Corporate Financial Accounting
Corporate Financial Accounting
15th Edition
ISBN: 9781337398169
Author: Carl Warren, Jeff Jones
Publisher: Cengage Learning
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Textbook Question
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Chapter 6, Problem 6.3MAD

Analyze and compare Costco, Wal-Mart, and Nordstrom

 The general merchandise retail industry has a number of segments represented by the following companies:

Company Name Merchandise Concept
Costco Wholesale Corporation (COST) Membership warehouse
Wal-Mart Stores, Inc. (WMT) Discount general merchandise
Nordstrom, Inc. (JWN) Fashion department store

For a recent war, the following cost of goods sold and beginning and ending inventories are provided from corporate annual reports (in millions) for these three companies:

Chapter 6, Problem 6.3MAD, Analyze and compare Costco, Wal-Mart, and Nordstrom The general merchandise retail industry has a , example  1

  1. a. Determine the inventory turnover ratio for all three companies. Round all calculations to one decimal place.
  2. b. Determine the number of days’ sales in inventory for all three companies. Use 365 days and round all calculations to one decimal place.
  3. c. Chapter 6, Problem 6.3MAD, Analyze and compare Costco, Wal-Mart, and Nordstrom The general merchandise retail industry has a , example  2 Interpret these results based on each company’s merchandising concept.

(a)

Expert Solution
Check Mark
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:

Inventory turnover=Cost of goods soldAverage inventory

To determine: the inventory turnover for Company C, Company W and Company N

Answer to Problem 6.3MAD

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.

Explanation of Solution

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

Inventory turnover=Cost of goods soldAverage inventory=$102,9018,938.5(1)=11.5 Times

Working notes:

The average inventory is calculated as follows:

Average inventory=(Inventory, beginning of the year + Inventory, end of the year)2=(8,908+8,969)2=8,938.5 (1)

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

Inventory turnover=Cost of goods soldAverage inventory=$360,98444,805(2)=8 Times

Working notes:

The average inventory is calculated as follows:

Average inventory=(Inventory, beginning of the year + Inventory, end of the year)2=(45,141+44,469)2=44,805 (2)

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

Inventory turnover=Cost of goods soldAverage inventory=$9,1681,839(3)=5 Times

Working notes:

The average inventory is calculated as follows:

Average inventory=(Inventory, beginning of the year + Inventory, end of the year)2=(1,733+1,945)2=1,839 (3)

Conclusion

The inventory turnover of Company C is 11.5 Times, the inventory turnover of Company W is 8 Times and the inventory turnover of Company N is 5 Times.

(b)

Expert Solution
Check Mark
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:

Days' sales in inventory=Days in accounting periodInventory turnover

To determine: the Days’ sales in inventory ratio for Company C, Company W and Company N.

Answer to Problem 6.3MAD

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.

Explanation of Solution

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

Days' sales in inventory=Days in accounting periodInventory turnover=36511.5=31.7 days

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

Days' sales in inventory=Days in accounting periodInventory turnover=3658=45.6 days

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

Days' sales in inventory=Days in accounting periodInventory turnover=3655=73 days

Conclusion

The Days’ sales in inventory of Company C is 31.7 days, the Days’ sales in inventory of Company W is 45.6 days, & the Days’ sales in inventory of Company N is 73 days.

(c)

Expert Solution
Check Mark
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:

Inventory turnover=Cost of goods soldAverage 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:

Days' sales in inventory=Days in accounting periodInventory turnover

To interpret: the above calculated ratios.

Explanation of Solution

The inventory turnover ratio and number of days’ sales in inventory of all the three companies reflect the merchandising approaches of all companies. Company C is a club warehouse and it has approach of holding only items which are quickly sold. Most of the items are sold in bulk at very attractive prices.

In case of company W, it has a traditional discounter approach. Even though it has attractive pricing, the inventory movement is slower than in the case of company C.

In the case of company N, it is a high-end fashioner retailer. It offers a wide collection of specialty and unique goods that are specifically designed for fashion market rather than for general mass market. Therefore, the movement is slower than other two companies yet it has highest margin.

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Chapter 6 Solutions

Corporate Financial Accounting

Ch. 6 - Cost flow methods The following three identical...Ch. 6 - Perpetual inventory using FIFO Beginning...Ch. 6 - Perpetual inventory using LIFO Beginning...Ch. 6 - Perpetual inventory using weighted average...Ch. 6 - Periodic inventory using FIFO, LIFO, and weighted...Ch. 6 - Lower-of-cost-or-market method On the basis of the...Ch. 6 - Effect of inventory errors During the taking of...Ch. 6 - Effect of inventory errors During the taking of...Ch. 6 - Control of inventories Triple Creek Hardware Store...Ch. 6 - Control of inventories Hardcase Luggage Shop is a...Ch. 6 - Perpetual inventory using FIFO Beginning...Ch. 6 - Perpetual inventory using LIFO Assume that the...Ch. 6 - Perpetual inventory using LIFO Beginning...Ch. 6 - Perpetual inventory using FIFO Assume that the...Ch. 6 - FIFO and UFO costs under perpetual inventory...Ch. 6 - Weighted average cost flow method under perpetual...Ch. 6 - Weighted average cost flow method under perpetual...Ch. 6 - Perpetual inventory using FIFO Assume that the...Ch. 6 - Perpetual inventory using LIFO Assume that the...Ch. 6 - Periodic inventory by three methods The units of...Ch. 6 - Periodic inventory by three methods; cost of goods...Ch. 6 - Comparing inventory methods Assume that a firm...Ch. 6 - Lower-of-cost-or-market inventory On the basis of...Ch. 6 - Inventory on the balance sheet Based on the data...Ch. 6 - Effect of errors n physical inventory Madison...Ch. 6 - Effect of errors in physical inventory Fonda...Ch. 6 - Error in inventory During 20Y5, the accountant...Ch. 6 - Retail method A business using the retail method...Ch. 6 - Retail method A business using the retail method...Ch. 6 - Prob. 6.22EXCh. 6 - Retail method On the basis of the following data,...Ch. 6 - Prob. 6.24EXCh. 6 - Gross profit method Based on the following data,...Ch. 6 - Gross profit method Based on the following data,...Ch. 6 - FIFO perpetual inventory The beginning inventory...Ch. 6 - LIFO perpetual inventory The beginning inventory...Ch. 6 - Weighted average cost method with perpetual...Ch. 6 - Periodic inventory by three methods The beginning...Ch. 6 - Periodic inventory by three methods Dymac...Ch. 6 - Lower-of-cost-or-market inventory Data on the...Ch. 6 - Retail method; gross profit method Selected data...Ch. 6 - FIFO perpetual inventory The beginning inventory...Ch. 6 - LIFO perpetual inventory The beginning inventory...Ch. 6 - Weighted average cost method with perpetual...Ch. 6 - Periodic inventory by three methods The beginning...Ch. 6 - Periodic inventory by three methods Pappas...Ch. 6 - Lower-of-cost-or-market inventory Data on the...Ch. 6 - Retail method; gross profit method Selected data...Ch. 6 - Prob. 6.1MADCh. 6 - Analyze and compare Darden Restaurants to Panera...Ch. 6 - Analyze and compare Costco, Wal-Mart, and...Ch. 6 - Analyze and compare Monster Beverage and...Ch. 6 - Ethics in Action Sizemo Elektroniks sells...Ch. 6 - Ethics in Action Anstead Co. is experiencing a...Ch. 6 - Communication Golden Eagle Company began...
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