Financial statement data for years ending December 31 for Holland Company follow:
20Y4 20Y3 Cost of merchandise sold $4,504,500 $3,715,200 Inventories:
Beginning of year 788,000 760,000 End of year 850,000 788,000
a. Determine the inventory turnover for 20Y4 and 20Y3.
b. Determine the days’ sales in inventory for 20Y4 and 20Y3. Use 365 days and round to one decimal place.
c. Does the change in inventory turnover and the days’ sales in inventory from 20Y3 to 20Y4 indicate a favorable or an unfavorable trend?
Answer:
a. Cost of merchandise sold Inventories: Beginning of year End of year Average inventory Inventory turnover b. Cost of merchandise sold Average daily cost of merchandise sold Average inventory Days’ sales in inventory Days’ Sales in Inventory
20Y4 20Y3 $4,504,500 $3,715,200 Inventory Turnover 5.5 4.8 $788,000 $760,000 $850,000 $788,000 $819,000 $774,000 20Y4 20Y3 [($788,000 + $850,000) ÷ 2] [($760,000 + $788,000) ÷ 2] $12,341.1 $10,178.6 $4,504,500 $3,715,200 ($819,000 ÷ $12,341.1) ($774,000 ÷ $10,178.6) c. The increase in the inventory turnover from 4.8 to 5.5 and the decrease in the days’ sales in inventory from 76.0 days to 66.4 days indicate favorable trends in managing inventory.