The following data are provided: December 31 2015 2014 $750,000 $500,000 800,000
ID: 2502031 • Letter: T
Question
The following data are provided:
December 31
2015
2014
$750,000
$500,000
800,000
600,000
1,300,000
1,100,000
3,500,000
3,250,000
550,000
400,000
100,000
50,000
700,000
700,000
1,000,000
1,000,000
1,200,000
900,000
800,000
650,000
2,000,000
1,750,000
6,400,000
4,200,000
1,450,000
750,000
Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The inventory turnover for 2015 is
December 31
2015
2014
Cash$750,000
$500,000
Accounts receivable (net)800,000
600,000
Inventories1,300,000
1,100,000
Plant assets (net)3,500,000
3,250,000
Accounts payable550,000
400,000
Income taxes payable100,000
50,000
Bonds payable700,000
700,000
10% Preferred stock, $50 par1,000,000
1,000,000
Common stock, $10 par1,200,000
900,000
Paid-in capital in excess of par800,000
650,000
Retained earnings2,000,000
1,750,000
Net credit sales6,400,000
Cost of goods sold4,200,000
Operating expenses1,450,000
Net income750,000
Explanation / Answer
Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period.
Generally it is calculated as:
Inventory Turnover = Sales / Inventory
However, it may also be calculated as:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors.
Thus, Appropriate Inventory Turnover ratio is 4,200 ÷ 1,200.
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