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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?

## 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
ïƒ° \$2,750,000 / [\$150,000 + \$140,000]/2
ïƒ° \$2,750,000 / \$145,000
ïƒ° 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.

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