Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:
Kroger Sprouts Whole Foods
Cost of merchandise sold $85,512 $2,541 $9,973
Inventory, end of year 5,688 165 500
Inventory, beginning of year 5,651 143 441
a. Determine the inventory turnover. Round to two decimal places.
b. Determine the days’ sales in inventory. Round to one decimal place.
c. Interpret your results in parts (a) and (b).
d. If Kroger had Whole Foods’ days’ sales in inventory, how much additional cash flow (rounded to nearest million) would have been generated from the smaller inventory relative to its actual average inventory position?
Answer:
a. Sprouts: ($500 + $441) ÷ 2 b. Inventory Turnover Cost of Merchandise Sold Average Inventory Kroger: = ($5,688 + $5,651) ÷ 2
($165 + $143) ÷ 2 = = $4,030 Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows: Actual average inventory............................................. $5,670 million Hypothetical average inventory.................................... 4,030 million Positive cash flow potential....................................... $1,640 million That is, a lower average inventory amount would have required less cash than actually was required.