Question

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr					1 Yr Ago			2 Yrs Ago
Assets
Cash		$	35,940			$	42,011		$	43,761
Accounts receivable, net			89,000				62,600			51,100
Merchandise inventory			110,000				83,500			57,000
Prepaid expenses			11,574				11,028			4,862
Plant assets, net			368,799				331,303			289,777
Total assets		$	615,313			$	530,442		$	446,500
Liabilities and Equity
Accounts payable		$	151,681			$	88,748		$	58,349
Long-term notes payable secured by mortgages on plant assets			114,522				120,782			97,690
Common stock, $10 par value			162,500				162,500			162,500
Retained earnings			186,610				158,412			127,961
Total liabilities and equity		$	615,313			$	530,442		$	446,500

The company’s income statements for the Current Year and 1 Year Ago, follow. Assume that all sales are on credit:

For Year Ended December 31	Current Yr						1 Yr Ago
Sales				$	799,907					$	631,226
Cost of goods sold	$	487,943					$	410,297
Other operating expenses		247,971						159,700
Interest expense		13,598						14,518
Income tax expense		10,399						9,468
Total costs and expenses					759,911						593,983
Net income				$	39,996					$	37,243
Earnings per share				$	2.46					$	2.29

(3-a) Compute inventory turnover.
(3-b) For each ratio, determine if it improved or worsened in the current year.

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr					1 Yr Ago			2 Yrs Ago
Assets
Cash		$	35,940			$	42,011		$	43,761
Accounts receivable, net			89,000				62,600			51,100
Merchandise inventory			110,000				83,500			57,000
Prepaid expenses			11,574				11,028			4,862
Plant assets, net			368,799				331,303			289,777
Total assets		$	615,313			$	530,442		$	446,500
Liabilities and Equity
Accounts payable		$	151,681			$	88,748		$	58,349
Long-term notes payable secured by mortgages on plant assets			114,522				120,782			97,690
Common stock, $10 par value			162,500				162,500			162,500
Retained earnings			186,610				158,412			127,961
Total liabilities and equity		$	615,313			$	530,442		$	446,500

The company’s income statements for the Current Year and 1 Year Ago, follow. Assume that all sales are on credit:

For Year Ended December 31	Current Yr						1 Yr Ago
Sales				$	799,907					$	631,226
Cost of goods sold	$	487,943					$	410,297
Other operating expenses		247,971						159,700
Interest expense		13,598						14,518
Income tax expense		10,399						9,468
Total costs and expenses					759,911						593,983
Net income				$	39,996					$	37,243
Earnings per share				$	2.46					$	2.29

(3-a) Compute inventory turnover.
(3-b) For each ratio, determine if it improved or worsened in the current year.

Answer 1

3a
Inventory Turnover
	Choose Numerator:	/	Choose Denominator:	=	Inventory Turnover
	Cost of goods sold	/	Average inventory	=	Inventory turnover
Current Yr	487943	/	96750	=	5.0	times
1 Yr Ago	410297	/	70250	=	5.8	times
3b
Inventory turnover worsened in the current year.
Workings:
	Average inventory
Current Yr	96750		=(110000+83500)/2
1 Yr Ago	70250		=(57000+83500)/2