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

The following financial statement data for years ending December 31 for Pinnell Company
are shown below.
                                                                     2012                    2011
Cost of merchandise sold                        $1,800,000         $1,428,000
Inventories:
 Beginning of year                                     $570,000            $450,000
 End of year                                                 630,000              570,000

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...                           $1,800,000               $1,428,000
Inventories:  
Beginning of year............                                 $570,000                 $450,000  
End of year.......................                                $630,000                  $570,000
Average inventory...............                             $600,000                  $510,000
                                                   [($570,000 + $630,000) ÷ 2] [($450,000 + $570,000) ÷ 2]
Inventory turnover...............                                 3.0                            2.8
                                                        ($1,800,000 ÷ $600,000) ($1,428,000 ÷ $510,000)


b. Number of Days’ Sales in  Inventory              2012                          2011  
Cost of merchandise sold...                            $1,800,000                $1,428,000
Average daily cost of  merchandise sold........$4,931.5                      $3,912.3
                                                        ($1,800,000 ÷ 365 days) ($1,428,000 ÷ 365 days)
Average inventory...............                            $600,000                     $510,000
                                                 [($570,000 + $630,000) ÷ 2] [($450,000 + $570,000) ÷ 2]
Number of days’ sales  in inventory............... 121.7 days                  130.4 days
                                                           ($600,000 ÷ $4,931.5) ($510,000 ÷ $3,912.3)


c. The increase in the inventory turnover from 2.8 to 3.0 and the decrease in the number of days’ sales in inventory from 130.4 days to 121.7 days indicate favorable trends in managing inventory.


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