20Y7 20Y6 Cost of merchandise sold $3,864,000 $4,001,500 Inventories: Beginning of year 770,000 740,000 End of year 840,000 770,000
a. Determine the inventory turnover for 20Y7 and 20Y6.
b. Determine the days’ sales in inventory for 20Y7 and 20Y6. Use 365 days and round to one decimal place.
c. Does the change in inventory turnover and the days’ sales in inventory from 20Y6 to 20Y7 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 ($3,864,000 ÷ 365 days) ($4,001,500 ÷ 365 days) $805,000 $755,000 [($770,000 + $840,000) ÷ 2] [($740,000 + $770,000) ÷ 2] ($805,000 ÷ $10,586.3) ($755,000 ÷ $10,963.0) c. The decrease in the inventory turnover from 5.3 to 4.8 and the increase in the days’ sales in inventory from 68.9 days to 76.0 days indicate unfavorable trends in managing inventory.