Question

Happy Rags, Inc. sells women's clothes. Provided below is selected financial statement information: Happy Rags, Inc. Selected Financial Statement data Fiscal year end 2010 2009 (amounts in thousands of dollars)

Net sales $47,895 $42,589

Cost of Goods Sold (35,952 ) (32,588 )

Gross profit $11,943 $10,001

Inventory $ 5,548 $ 4,948

Happy Rags, Inc. projects that sales will grow at a compound rate of 7% per year for years 2011- 2013 and that the cost of goods sold to sales percentage will equal that realized in 2010. Compute the projected implied level of inventory at the end of 2011 to 2013.

Answer 1

Year	Ending Inventory
2011	$5,684
2012	$6,334
2013	$6,525

Working:

Year	Net Sales	Cost of Goods Sold	Inventory Turnover	Beginning Inventory	Ending Inventory
2010	47895	35952	6.85	4948	5548
2011	51247.65	38469	6.85	5548	5684
2012	54834.99	41161	6.85	5684	6334
2013	58673.43	44043	6.85	6334	6525

Cost of goods sold/Net sales = $35952/$47895

Inventory turnover = Cost of goods sold/Average inventory = $35952/[0.5 x ($5548 + $4948)] = $35952/$5248 = 6.85

Assuming the ending inventory to be 'X' and solving the inventory turnover formula for each year, we can get the projected ending inventory.

For 2011:

6.85 = 38649/[0.5 x (5548 + X)]

X = 5684

For 2012:

6.85 = 41161/[0.5 x (5684 + X)]

X = 6334

For 2013:

6.85 = 44043/[0.5 x (6334 + X)]

X = 6525