Answer:
1. Inventory turnover ratio for current year = $6,375,000 ÷ $850,000 = 7.5
Inventory turnover ratio for previous year = $7,380,000 ÷ $820,000 = 9.0
2. Days' sales in inventory for current year = 365 ÷ 7.5 = 48.6 days
Days' sales in inventory for current year = 365 ÷ 9.0 = 40.5 days
Explanation:
1. The formula of inventory turnover ratio is shown below:
= Cost of goods sold ÷ average inventory
where,
average inventory = (opening inventory + ending inventory) ÷ 2
For current year = ($840,000 + $860,000) ÷ 2 = $850,000
For previous year = ($800,000 + $840,000) ÷ 2 = $820,000
And, the cost of goods for current year is $6,375,000
For previous year it is $7,380,000
So,
Inventory turnover ratio for current year = $6,375,000 ÷ $850,000 = 7.5
Inventory turnover ratio for previous year = $7,380,000 ÷ $820,000 = 9.0
2. The formula to compute number of days' sales in inventory is shown below:
= Number of days ÷ inventory turnover ratio
given that, number of days = 365
So,
Days' sales in inventory for current year = 365 ÷ 7.5 = 48.6 days
Days' sales in inventory for current year = 365 ÷ 9.0 = 40.5 days
