Question

A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. its days in inventory is:

Answer 1

Days in invetory meDays in Inventory measures the average number of days it takes to turn inventory to sales.
To get the days in inventory the formula is :Days in Inventory = 365/Inventory Turnover
To get the Inventory Turnover the formula is : Inventory Turnover Ratio= Cost of Goods/ [(Beginning Inventory Balance + Ending Inventory Balance)/2]
Beginning Inventory Balance: $100Ending Inventory Balance: $500Cost of Goods/Sales: $ 1500
Inventory Turnover Ratio = 1500/ [(100+500)/2]Inventory Turnover Ratio = 1500/300Inventory Turnover Ratio = 5
Days In Inventory = 365/5Days In Inventory = 73

Answer: 73 days

Answer 2

The inventory in days is 36.5 days

Further Explanation:

Inventory Turnover Ratio:  It is an activity ratio which measure of how suitably a company is handling its inventory to generates sales. The inventory turnover ratio is calculated as:

$\text{Inventory Turnover Ratio}=\dfrac{\text{Cost of goods sold}}{\text{Average Inventory}}$

 

Calculate the days in inventory:

$\begin{aligned}\text{Days in inventory}&=\dfrac{\text{365}}{\text{Inventory Turnover Ratio}}\\&=\frac{365}{10}\\ &=36.5\text{days}\end{aligned}$

 

Therefore, the inventory in days is 36.5 days  

Working note 1:

Calculate the cost of goods sold:

$\begin{aligned}\text{Cost of goods sold}&=\text{Sales}-\text{Operating profit}\\ &=\ 1,500-\ 500\\ &=\ 1,000\end{aligned}$

Working note 2:

Calculate the inventory turnover ratio:

$\begin{aligned}\text{Inventory Turnover Ratio}&=\frac{\text{Cost of goods sold}}{\text{Average Inventory}}\\ &=\frac{\ 1000}{\ 100}\\ &=\ 10\end{aligned}$

 

Learn more:

1. the span of control

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2. the percentage of sales method

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3. the sales budget

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Answer details:

Grade: High School

Subject: Financial Accounting

Chapter: Ratio Analysis

Keywords: A firm has $100 of average inventory, operating profit of $500, sales of $1,500, days in inventory.