Question

The following balances come from the financial statements of Way Industries: Sales revenue $850,000; Accounts receivable $280,000; Beginning inventory $50,000; Ending inventory $30,000; Net purchases $460,000; Sales returns $50,000; Sales discount $20,000. Given this information, what is the company's inventory turnover ratio? a) 28.33. b) 16.0. c)21.25. d) 12.0.

Answer 1

Answer: 12

Explanation: The ratio of  number of times an inventory is used or sold in a specific period , generally a year, is called inventory turnover ratio. It can be computed by using the following formula :-

= $\frac{cost\of\goods\sold}{average\inventory}$

where,

cost of goods sold = beginning inventory + net purchase - ending inventory

                               = $50,000 + $460,000 - $30,000

                               = $ 480,000

average inventory  = $\frac{beginning\invetory+closing\inventory}{2}$

                               =$\frac{50000+30000}{2}$

                               = $40,000

so,

inventory turnover ratio = $\frac{480000}{40000}$

                                       = 12