Question

Inventory turnover and number of days’ sales in inventory Financial statement data for years ending December 31 for Tango Company follow: 20Y7 20Y6 Cost of goods sold $3,654,015 $3,739,060 Inventories: Beginning of year 737,300 700,800 End of year 817,600 737,300 Required a. Determine the inventory turnover for 20Y7 and 20Y6. Round to one decimal place. 20Y7 20Y6 Inventory turnover b. Determine the number of days’ sales in inventory for 20Y7 and 20Y6. Use 365 days and round to one decimal place. 20Y7 20Y6 Number of days’ sales in inventory days days c. Are the changes in inventory turnover and the number of days’ sales in inventory from 20Y6 to 20Y7 favorable or unfavorable?

Answer 1

Answer:

Description                                 2017                  2016

a. inventory turn over                 4.70 times           5.20 times

b.  Number of days’ sales           77.66 days           70.19 days

in inventory days days

c. Trend is Unfavorable          

Explanation:

a. Inventory Turn over : It is type of efficiency ration which shows how many times the company sold its inventory during the year.

Inventory Turn over = Cost of goods sold inventory / Average inventory

Description                                          2017                      2016

Merchandise sold- Cost-i                 3,654,015           3,739,060  

Opening Inventory-ii                         737,300               700,800

Closing inventory-iii                          817,600                 737,300  

Average inventory-iv-(ii+iii)/2          777,450                    719,050  

Inventory turn over-v-(i/iv)                   4.70  times           5.20 times  

b. Number of days’ sales in inventory : This ratio shows in how many days the company sold out its inventories or stocks during the year.

No. of days in year- vi-                             365                     365

Average daily cost of Merchandise sold-vii-(i/vi) 10,011    10,244

No. of days sales in inventory-viii-(iv/vii)  77.66 days   70.19 days

c. The trend for the year 2017 is unfavorable as the inventory ratio decreased from 5.20 times to 4.70 times and its no. of days sales in inventory days increased from 70.19 days to 77.66 days. This means that the company is facing difficulty in selling its inventory in year 2017.