Current Year Preceding Year
Sales $12,750,000 $13,284,000
Beginning inventories 840,000 800,000
Cost of goods sold 6,375,000 7,380,000
Ending inventories 860,000 840,000
a. Determine for each year (1) the inventory turnover and (2) the number of days’ sales in inventory. Round to the nearest dollar and one decimal place.
b. What conclusions can be drawn from these data concerning the inventories?
Answer:
a. (1) Inventory Turnover = Cost of Goods Sold
Average Inventory
Current Year: $6,375,000
($860,000 + $840,000) ÷ 2
= 7.5
Preceding Year: $7,380,000
($840,000 + $800,000) ÷ 2
= 9.0
(2) Number of Days’ Sales in Inventory = Average Inventory
Average Daily Cost of Goods Sold
Current Year:
Preceding Year:
($860,000 + $840,000) ÷ 2
$17,466 *
($840,000 + $800,000) ÷ 2
$20,219 **
= 48.7 days
= 40.6 days
* $17,466 = $6,375,000 ÷ 365 days
** $20,219 = $7,380,000 ÷ 365 days
b. The inventory position of the business has deteriorated. The inventory turnover has decreased, while the number of days’ sales in inventory has increased. The sales volume has declined faster than the inventory has declined, thus resulting in the deteriorating inventory position.