Analysis of Inventory - Analysis of Inventory For companies...

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Analysis of Inventory For companies that sell goods, managing inventory levels can be one of the most critical tasks. Having too much inventory on hand costs the company money in storage costs, interest cost (on funds tied up in inventory), and costs associated with the obsolescence of technical goods (e.g., computer chips) or shifts in fashion (e.g., clothes). But having too little inventory on hand results in lost sales. In this section we discuss some issues related to evaluating inventory levels. Inventory Turnover Ratio The inventory turnover ratio is calculated as cost of goods sold divided by average inventory . It indicates how quickly a company sells its goods—the number of times the average inventory “turns over” (is sold) during the year. Inventory turnover can be divided into 365 days to compute days in inventory , which indicates the average number of days inventory is held. High inventory turnover (low days in inventory) indicates the company has minimal funds tied up in inventory—that it has a minimal amount of inventory on hand at any one time. Although minimizing the funds tied up in inventory is efficient, too high an inventory turnover ratio may indicate that the company is losing sales opportunities because of inventory shortages. For example, investment analysts at one time suggested that Office Depot had gone too far in reducing its inventory—they said they were seeing too many empty shelves. Thus, management should closely monitor this ratio to achieve the best balance between too much and too little inventory. In Chapter 5 we discussed the increasingly competitive environment of retailers like Wal-Mart and Target. Wal-Mart has implemented just-in-time inventory procedures as well as many technological innovations to improve the efficiency of its inventory management. The following data are available for Wal-Mart. (in millions)
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This note was uploaded on 11/06/2011 for the course ACCOUNTING ac 201 taught by Professor - during the Spring '11 term at Montgomery.

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Analysis of Inventory - Analysis of Inventory For companies...

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