Chapter 6, Problem 6.1MAD

(a)

To determine

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

To determine: the inventory turnover for Company T and Company A

Answer to Problem 6.1MAD

The inventory turnover of Company T is 6.2 times & the inventory turnover of Company A is 7.7 Times.

Explanation of Solution

The inventory turnover ratio for Company T is calculated as follows:

$\begin{array}{c}\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$51,997}{8,441.5\left(1\right)}\\ =6.2\text{ Times}\end{array}$

Working notes:

The average inventory is calculated as follows:

$\begin{array}{c}\text{Average inventory}=\frac{\left(\begin{array}{l}\text{Inventory, beginning of the year + }\\ \text{Inventory, end of the year}\end{array}\right)}{2}\\ =\frac{\left(8,282+8,601\right)}{2}\\ =8441.5\end{array}$ (1)

The inventory turnover ratio for Company A is calculated as follows:

$\begin{array}{c}\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$71,651}{9,271\left(2\right)}\\ =7.7\text{ Times}\end{array}$

Working notes:

The average inventory is calculated as follows:

$\begin{array}{c}\text{Average inventory}=\frac{\left(\begin{array}{l}\text{Inventory, beginning of the year + }\\ \text{Inventory, end of the year}\end{array}\right)}{2}\\ =\frac{\left(8,299+10,243\right)}{2}\\ =9,271\end{array}$ (2)

The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory during the period. The average inventory is calculating by dividing beginning inventory and ending inventory by 2. The inventory turnover ratio is an important measure as to how efficient is the management is good at managing inventory and achieving sales from it.

Conclusion

Therefore, the inventory turnover of Company T is 6.2 Times & the inventory turnover of Company A is 7.7 Times.

(b)

To determine

Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. The formula to calculate the days’ sales in inventory ratio is as follows:

$\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}$

To determine: the Days’ sales in inventory ratio Company T and Company A.

Answer to Problem 6.1MAD

The days’ sales in inventory of Company T are 58.8 days, & the Days’ sales in inventory of Company A is 47.4 days.

Explanation of Solution

The Days’ sale in inventory ratio for Company T is calculated as follows:

$\begin{array}{c}\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}\\ =\frac{365}{6.2}\\ =\text{58}\text{.8 days}\end{array}$

The Days’ sale in inventory ratio for Company A is calculated as follows:

$\begin{array}{c}\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}\\ =\frac{365}{7.7}\\ =\text{ 47}\text{.4}\text{days}\end{array}$

The Days’ sales in inventory ratio are calculated by dividing days in accounting period by inventory turnover ratio. The Days’ sale in inventory ratio is an important measure to know how long the company is holding the inventory before selling when compared to its peers.

Conclusion

Therefore, the Days’ sales in inventory of Company T are 58.8 days, & the Days’ sales in inventory of Company A is 47.4 days.

(c)

To determine

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

To state: the company that has better inventory efficiency.

Answer to Problem 6.1MAD

The Company A has better efficiency in inventory turnover when compared to company T.

Explanation of Solution

The company A has higher inventory turnover ratio of 7.7 and lesser number of days’ sales in inventory of 47.4 days when compared to company T’s inventory turnover ratio of 6.2 and number of days’ sales in inventory of 58.8 days.

(d)

To determine

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. The formula to calculate the days’ sales in inventory ratio is as follows:

$\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}$

To explain: the difference in inventory efficiency between two companies.

Explanation of Solution

The main difference in the inventory efficiency between both the companies is that merchandising strategy followed. The Company A uses internet as medium for selling goods and direct shipping of merchandise inventory is not handled as company A’s inventory, whereas company T uses traditional retail store method which makes them to stock more level of inventory in retail outlet. The company T’s strategy requires a significant investment in inventory as it can be seen in its inventory turnover and number of days’ sales in inventory