buswebl.fau.edu ACG 2021-001: Principles of Accounting 1 Accounting Archive | Ma

Question

buswebl.fau.edu ACG 2021-001: Principles of Accounting 1 Accounting Archive | May 15, 2017 I Chegg.c 021 November 30, 2017 Part 1 1000 2s Refer to the Simon Company information in Exercise 13-6. The 375 1Assume that all sales are on credit and then compute: (1) company's income statements for the years ended December 31, 2017 and 2016, are displayed to the left. 9 days' sales uncollected g2,SDD 800 200 (2) accounts receivable turpSt 500 500 1/2. S30 nover, and x345 (3) inventory t 2.0 (4) days' sales in inventory. Comment on the changes in the ratios from 2016 to 2017. (Round amounts to one decimal.) 3229 1x

Explanation / Answer

Inventory turnover and days' sales in inventory ratios are always calculated using cost of goods sold and average inventory. Net sales is never used to calculate these ratios.

Sales includes gross margin.

Sales = Cost of goods sold + gross margin

Therefore, if sales is used to calculate these two ratios, the ratios will not give a correct idea of how fast the inventory is being sold and required to be replaced.

Formulas used to calculate the ratios are as follows:

Inventory turnover = Cost of goods sold/Average inventory

Days' sales in inventory = Number of days in a year/Inventory turnover

Or,

Days' sales in inventory = (Average inventory x Number of days in a year)/Cost of goods sold

Average inventory is calculate by dividing the sum of the balances of inventory for the previous year and the current year by 2. For example, average inventory for 2017 will be calculated as follows:

Average inventory for 2017

= (Merchandise inventory for 2017 + Merchandise inventory for 2016)/2

= (112500+82500)/2

= 97500

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