Question

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.

The net sales for the year were $983,000 with a gross profit on sales of $295,000.

A. Determine the inventory turnover ratio and average days in inventory for the current year.

B. Explain the meaning of each number in A) above.

Answer 1

A. Given ,

Opening stock =$ 1,10,000

Closing stock =$1,02,000

Sales =$ 9,83,000

Gross profit =$2,95,000

Inventory turnover ratio= cost of goods sold / Average inventory.

Average Inventory= (opening inventory+ closing inventory)/2

=($1,10,000+$1,02,000)/2

=1,06,000

Cost of goods sold=Opening stock+ purchases -closing stock (or) Sales- Gross profit

= $9,83,000-$2,95,000

=$6,88,000.

Hence, Inventory turnover ratio= cost of goods sold/ Average inventory

=$6,88,000/$1,06,000=6.49 times.

Average days in inventory=365/ Inventory turnover ratio

=365/6.49

= 56.24 days

B. Inventory turnover ratio shows how many times on an average inventory is sold by the management in a given period.

High inventory turnover ratio depicts strong sales and low inventory turnover ratio shows poor sales or low sales.

Average days is inventory means how many days the goods are held in inventory before being sold. It can also be said as time taken for the completion of one operating cycle.