The following data have been extracted from the financial statements of a firm for two years, 1985 and 1986:
1985 1986
Assets 4,376 5,214 -
Sales 8,312 7,845 -
Receivables 985 756 -
Inventory 1,108 1,243 -
COGS 5,494 4,971 -
The inventory turnover ratio and the average inventory processing period for 1986 equal ________.
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A. B. C. D.A
One of the properties of the inventory that is of interest is the rate at which it turns over i.e. the average processing time it takes for a given inventory item to be sold. This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods-sold. COGS is preferable since it does not include the profit margins involved in net sales. Therefore, two relevant ratios are: a. Inventory turnover ratio = COGS/average inventory. b. Average inventory processing period = 365/inventory turnover. For 1986, the average inventory equals (1243+1108)/2 = 1,176. Inventory turnover ratio = 4,971/1,176 = 4.23. Average inventory processing period = 365/4.23 = 86.31 days.