The following data were taken from the annual reports of 4th of July! Inc., a ma

ID: 2618519 • Letter: T

Question

The following data were taken from the annual reports of 4th of July! Inc., a manufacturer of fireworks, and IS Solutions Inc., a manufacturer of computers.

4th of July!, Inc.

IS Solutions, Inc.

Cost of merchandise sold

$840,000

$11,540,000

Inventory, end of year

190,000

320,000

Inventory, beginning of year

240,000

290,000

(a) Determine the (1) inventory turnover and (2) number of days' sales in inventory for 4th of July! and IS Solutions. Round your answers to two decimal places.

(b) How would you expect these measures to compare between the companies? Why?

4th of July!, Inc.

IS Solutions, Inc.

Cost of merchandise sold

$840,000

$11,540,000

Inventory, end of year

190,000

320,000

Inventory, beginning of year

240,000

290,000

Explanation / Answer

Solution:-

a) 1) Inventory turnover

4th of July!, Inc =3.91 times

IS Solutions, Inc.= 37.84 times

2) Number of days sales

4th of July!, Inc =92.07 days

IS Solutions, Inc.= 9.51 days

Particulars

4th of July!, Inc

IS Solutions, Inc.

Inventory turnover=COGS/Average inventory

Where Average inventory = (Opening +closing inventory)/2

Average inventory

=(240,000+190,000)/2

=215,000

=(290,000+320,000)/2

=305,000

Inventory turnover

=840,0000/215,000

=3.91 times

=11,540,000/305,000

=37.84 times

Number of days sales

=360/Inventory turnover

=360/3.91

=92.07 days

=360/37.84

=9.51 days

Note 1:- we have assumed 360 days in a year

Note2 :- Inventory turnover means number of times the company has replaced the inventory in a year.

Note3:- Number of days sales tells us that how many days does the company took to sell the average inventory.

b) Inventory turnover helps to determine , how many times , the company has changed its inventory. That is how fast the company sells its inventory. Higher the inventory turnover ratio the better the company because it sells inventory fast.

Days in sales is the average number of days taken to sell the average inventory. The lower the number of days the better is the company.

Hence by comparing these two we can measure the two company to determine which is more efficient.

Please feel free to ask if you have any query in the comment section.