PE 7-7A Inventory turnover and number of days’ sales in inventory

The following financial statement data for years ending December 31 for Gillispie Company
are shown below.
                                                         2012                     2011
Cost of merchandise sold            $882,000               $680,000
Inventories:
     Beginning of year                   $200,000               $140,000
     End of year                               290,000                 200,000

a. Determine inventory turnover for 2012 and 2011.
b. Determine the number of days’ sales in inventory for 2012 and 2011. Round to one
decimal place.
c. Does the change in inventory turnover and the number of days’ sales in inventory
from 2011 to 2012 indicate a favorable or unfavorable trend?

Answer:

a. Inventory Turnover                              2012                      2011
Cost of merchandise sold...                  $882,000               $680,000
Inventories:  
Beginning of year............                     $200,000               $140,000
End of year.......................                    $290,000                $200,000
Average inventory...............                 $245,000                $170,000
                                      [($200,000 + $290,000) ÷ 2] [($140,000 + $200,000) ÷ 2]
Inventory turnover...............                     3.6                           4.0
                                               ($882,000 ÷ $245,000) ($680,000 ÷ $170,000)


b. Number of Days’ Sales in  Inventory                2012                       2011  
Cost of merchandise sold...                                $882,000                $680,000  
Average daily cost of  merchandise sold............ $2,416.4                $1,863.0
                                                           ($882,000 ÷ 365 days) ($680,000 ÷ 365 days)  
Average inventory...............                                $245,000              $170,000
                                                  [($200,000 + $290,000) ÷ 2] [($140,000 + $200,000) ÷ 2]  
Number of days’ sales in  inventory...................101.4 days              91.3 days
                                                            ($245,000 ÷ $2,416.4) ($170,000 ÷ $1,863.0)

c. The decrease in the inventory turnover from 4.0 to 3.6 and the increase in the number of days’ sales in inventory from 91.3 days to 101.4 days indicate unfavorable trends in managing inventory.

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