Question

The following data were extracted from the income statement of Keever Inc.: Current Year Previous Year Sales $18,500,000 $20,000,000 Beginning inventories 940,000 860,000 Cost of goods sold 9,270,000 10,800,000 Ending inventories 1,120,000 940,000
Current Year Previous Year
Sales $18,500,000 $20,000,000
Beginning inventories 940,000 860,000
Cost of goods sold 9,270,000 10,800,000
Ending inventories 1,120,000 940,000

Determine for each year (1) the inventory turnover and (2) the number of days' sales in inventory.

Answer 1

Answer:

1.The inventory turnover:

For the current year: 17.96

For the Previous Year: 22.22

2. The number of days' sales in inventory:

For the current year: 40.56 days

For the Previous Year: 30.42 days

Explanation:

1. The inventory turnover is calculated by using following formula:

Inventory turnover = Sales/Average Inventory

With:

Average inventory = (Beginning Inventory for the year + Ending Inventory for the year) /2

In the current year:

Average inventory = ($940,000 + $1,120,000)/2 = $1,030,000

Inventory turnover = $18,500,000/$1,030,000 = 17.96

In the Previous Year:

Average inventory = ($860,000 + $940,000)/2 = $900,000

Inventory turnover = $20,000,000/$900,000 =  22.22

2. The number of days' sales in inventory is calculated by formula:

The number of days' sales in inventory = (Average inventory / Cost of goods sold) x 365 days

In the current year:

The number of days' sales in inventory = ($1,030,000/$9,270,000)x365 = 40.56 days

In the Previous Year:

The number of days' sales in inventory = ($900,000/$10,800,000)x365 = 30.42 days