Question

Sauerbraten Corp. reported 2007 sales ($ in millions) of $2,157 and cost of goods sold of $1,827. Inventories at year - end 2007 and 2006, respectively, were $553 and $562. The company uses the LIFO method for inventory valuation and discloses that if the FIFO inventory valuation method had been used, inventories would have been $63.3 million and $56.8 million higher in 2007 and 2006, respectively. Compared to the inventory turnover ratio reported, if Sauerbraten had exclusively used the FIFO method its inventory turnover ratio would have been closest to?

Answer 1

Inventory Turnover Ratio :-

Cost of goods sold ÷ Average Inventory

$1820.50 ÷ $617.55

= 2.95 times

Explanations :-

Revised Cost of Goods sold under FIFO
COGS under LIFO	$ 1,827.00
Add: Effect of higher Beginning Inventory	$        56.80
Less: Effect of higher Ending Inventory	$        63.30
	$ 1,820.50

Revised Inventory under FIFO	2006	2007
Inventory under LIFO	$ 562.00	$ 553.00
Higher Inventory under FIFO	$    56.80	$    63.30
	$ 618.80	$ 616.30

Average Inventory = (Beggining Inventory + Ending Inventory)/2

= ($616.30 + $618.80)/2 = $617.55