EX 7-17 Inventory turnover and number of days’ sales in inventory
Kroger, Safeway Inc., and Winn-Dixie Stores Inc. are three grocery chains in the United States.
Inventory management is an important aspect of the grocery retail business. Recent balance
sheets for these three companies indicated the following merchandise inventory
information:
Merchandise Inventory
End of Year (in millions) Beginning of Year (in millions)
Kroger $4,859 $4,855
Safeway 2,591 2,798
Winn-Dixie 665 649
The cost of goods sold for each company were:
Cost of Goods Sold (in millions)
Kroger $58,564
Safeway 31,589
Winn-Dixie 5,269
a. Determine the number of days’ sales in inventory and inventory turnover for the three
companies. Round to the nearest day and one decimal place.
b. Interpret your results in part (a).
c. If Winn-Dixie had Kroger’s number of days’ sales in inventory, how much additional
cash flow (round to nearest million) would have been generated from the smaller
inventory relative to its actual average inventory position?
Answer:
a.
a. Number of Days’ Sales in Inventory =
old/365S Goods of Cost Inventory Average
Kroger, ()[ ] = = + 4.160 857,4$ 5$58,564/36 2/$4,855 $4,859 30 days
Safeway, ()[ ] = = + 5.86 5.694,2$ 5$31,589/36 2/$2,798 $2,591
31 days
Winn-Dixie, ()[ ] = = + 4.14 657$ $5,269/365 2/$649 $665
46 days
Inventory Turnover =
Inventory Average Sold Goods of Cost
Kroger, = + $4,855)/2($4,859 $58,564
12.1
Safeway, = + $2,798)/2($2,591 $31,589
11.7
Winn-Dixie, = + $649)/2($665 $5,269
8.0
b. The number of days’ sales in inventory and inventory turnover ratios are relatively the same for Kroger and Safeway. Winn-Dixie has significantly higher number of days sales in inventory and significantly lower inventory turnover than Kroger and Safeway. These results suggest that Kroger and Safeway are more efficient than Winn-Dixie in managing inventory.
c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical ending inventory would be determined as follows,
Number of Days’ Sales in Inventory =
Sold/365 Goods of Cost Inventory Average
30 days = X/($5,269/365)
X = 30 × ($5,269/365) = 30 × $14.4 per day
X = $432
Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows:
Actual average inventory......................... $657 million
Hypothetical average inventory .............. 432
Positive cash flow potential .................... $225 million
That is, a lower average inventory amount would have required less cash than actually was required.
Inventory management is an important aspect of the grocery retail business. Recent balance
sheets for these three companies indicated the following merchandise inventory
information:
Merchandise Inventory
End of Year (in millions) Beginning of Year (in millions)
Kroger $4,859 $4,855
Safeway 2,591 2,798
Winn-Dixie 665 649
The cost of goods sold for each company were:
Cost of Goods Sold (in millions)
Kroger $58,564
Safeway 31,589
Winn-Dixie 5,269
a. Determine the number of days’ sales in inventory and inventory turnover for the three
companies. Round to the nearest day and one decimal place.
b. Interpret your results in part (a).
c. If Winn-Dixie had Kroger’s number of days’ sales in inventory, how much additional
cash flow (round to nearest million) would have been generated from the smaller
inventory relative to its actual average inventory position?
Answer:
a.
old/365S Goods of Cost Inventory Average
Kroger, ()[ ] = = + 4.160 857,4$ 5$58,564/36 2/$4,855 $4,859 30 days
Safeway, ()[ ] = = + 5.86 5.694,2$ 5$31,589/36 2/$2,798 $2,591
31 days
Winn-Dixie, ()[ ] = = + 4.14 657$ $5,269/365 2/$649 $665
46 days
Inventory Turnover =
Inventory Average Sold Goods of Cost
Kroger, = + $4,855)/2($4,859 $58,564
12.1
Safeway, = + $2,798)/2($2,591 $31,589
11.7
Winn-Dixie, = + $649)/2($665 $5,269
8.0
b. The number of days’ sales in inventory and inventory turnover ratios are relatively the same for Kroger and Safeway. Winn-Dixie has significantly higher number of days sales in inventory and significantly lower inventory turnover than Kroger and Safeway. These results suggest that Kroger and Safeway are more efficient than Winn-Dixie in managing inventory.
c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical ending inventory would be determined as follows,
Number of Days’ Sales in Inventory =
Sold/365 Goods of Cost Inventory Average
30 days = X/($5,269/365)
X = 30 × ($5,269/365) = 30 × $14.4 per day
X = $432
Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows:
Actual average inventory......................... $657 million
Hypothetical average inventory .............. 432
Positive cash flow potential .................... $225 million
That is, a lower average inventory amount would have required less cash than actually was required.
