Inventory turnover and number of days’ sales in inventory

Question

Financial statement data for years ending December 31 for Tango Company follow:

Line Item Description 20Y7 20Y6
Cost of goods sold $3,864,000 $4,001,500
Inventories:
Beginning of year 770,000 740,000
End of year 840,000 770,000
Required

a. Determine the inventory turnover for 20Y7 and 20Y6. Round your answers to one decimal place.

Line Item Description 20Y7 20Y6
Inventory turnover fill in the blank 1 of 2
fill in the blank 2 of 2
b. Determine the days’ sales in inventory for 20Y7 and 20Y6. Use 365 days a year. Round your answers to one decimal place.

Line Item Description 20Y7 20Y6
Number of days’ sales in inventory fill in the blank 1 of 2
days fill in the blank 2 of 2
days
c. Are the changes in inventory turnover and the days’ sales in inventory from 20Y6 to 20Y7 favorable or unfavorable?

Answer 1

To determine the inventory turnover and the number of days' sales in inventory for Tango Company for the years 20Y7 and 20Y6, we can use the following formulas:

a. Inventory Turnover Calculation

Inventory Turnover = Cost of Goods Sold / Average Inventory

To find the average inventory, we can use:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Let's calculate the average inventory for each year:

For 20Y7:

• Beginning Inventory: $770,000
• Ending Inventory: $840,000

Average Inventory for 20Y7: \[ \text{Average Inventory} = \frac{(770,000 + 840,000)}{2} = \frac{1,610,000}{2} = 805,000 \]

Inventory Turnover for 20Y7: \[ \text{Inventory Turnover} = \frac{3,864,000}{805,000} \approx 4.8 \]

For 20Y6:

• Beginning Inventory: $740,000
• Ending Inventory: $770,000

Average Inventory for 20Y6: \[ \text{Average Inventory} = \frac{(740,000 + 770,000)}{2} = \frac{1,510,000}{2} = 755,000 \]

Inventory Turnover for 20Y6: \[ \text{Inventory Turnover} = \frac{4,001,500}{755,000} \approx 5.3 \]

Summary of Inventory Turnover:

• 20Y7: 4.8
• 20Y6: 5.3

b. Days' Sales in Inventory Calculation

Days' Sales in Inventory = 365 / Inventory Turnover

Now, we can calculate the number of days' sales in inventory for each year:

For 20Y7: \[ \text{Days' Sales in Inventory} = \frac{365}{4.8} \approx 76.0 \]

For 20Y6: \[ \text{Days' Sales in Inventory} = \frac{365}{5.3} \approx 68.8 \]

Summary of Days' Sales in Inventory:

• 20Y7: 76.0 days
• 20Y6: 68.8 days

c. Favorability of Changes

The changes in inventory turnover and days' sales in inventory from 20Y6 to 20Y7 show the following:

• Inventory Turnover decreased from 5.3 to 4.8, which is unfavorable as it indicates that the company is selling its inventory less frequently.
• Days' Sales in Inventory increased from 68.8 days to 76.0 days, which is also unfavorable as it suggests that inventory is taking longer to sell.

Final Answers:

a.

• Inventory turnover 20Y7: 4.8
• Inventory turnover 20Y6: 5.3

b.

• Number of days’ sales in inventory 20Y7: 76.0 days
• Number of days’ sales in inventory 20Y6: 68.8 days

c. The changes in inventory turnover and days’ sales in inventory from 20Y6 to 20Y7 are unfavorable.