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    Calculating the Inventory Turnover ratio

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    Prill Co has the following:
    Current Assets:.....................year 1...............year 2
    Cash and marketable securities 160,000 ....150,000
    Accounts receivable, net .......175,000... ....170,000
    Inventory ..........................140,000 .............150,000
    Total current assets ............475,000 .........470,000
    Current Liabilities:
    Accounts payable ................150,000 ........140,000
    Accrued liabilities ................50,000 .............60,000
    Notes payable, short term ......140,000 ......140,000
    Total current liabilities ...........340,000 ........340,000

    Sales ..........................$5,500,000
    Cost of goods sold .........$2,750,000

    Required: Calculate the Inventory Turnover ratio.

    What does this ratio tell management?

    © BrainMass Inc. brainmass.com December 24, 2021, 11:38 pm ad1c9bdddf
    https://brainmass.com/business/management-accounting/calculating-inventory-turnover-ratio-588835

    SOLUTION This solution is FREE courtesy of BrainMass!

    Prill Co has the following
    Current Assets:.....................year 1...............year 2
    Cash and marketable securities 160,000 ....150,000
    Accounts receivable, net .......175,000... ....170,000
    Inventory ..........................140,000 .............150,000
    Total current assets ............475,000 .........470,000
    Current Liabilities:
    Accounts payable ................150,000 ........140,000
    Accrued liabilities ................50,000 .............60,000
    Notes payable, short term ......140,000 ......140,000
    Total current liabilities ...........340,000 ........340,000
    Sales ..........................$5,500,000
    Cost of goods sold .........$2,750,000
    Required: Calculate the Inventory Turnover ratio.
    What does this ratio tell management?

    Formula:
    Inventory turnover ratio = Cost of goods sold / Average inventory
    Where: Average inventory = [Beginning inventory + Ending inventory]/2
     $2,750,000 / [$150,000 + $140,000]/2
     $2,750,000 / $145,000
     18.97 (or) 19 times
    Explanation:
    Inventory turnover ratio indicates the speed with which the inventory is converted into sales. It is an efficiency ratio that measures the number of times per period, a firm sells and replaces its batch of inventory again. A ratio of 19 indicates that this firm has sold and replaced its batch of inventory 19 times during the year.
    Higher the ratio, higher is the speed of inventory conversion and efficiency and lower the ratio, lower is the speed and efficiency. This ratio needs to be compared with the industry ratio or the competitor's ratio to know the actual performance of a firm.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 11:38 pm ad1c9bdddf>
    https://brainmass.com/business/management-accounting/calculating-inventory-turnover-ratio-588835

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