# Estimated inventory at march 31 at cost at retail

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Estimated Inventory at March 31 At Cost At Retail Goods available for sale Inventory, January 1 ...................................... \$ 301,580 Cost of goods purchased .............................. 941,040 Goods available for sale ................................ 1,242,620 Less estimated cost of goods sold Sales .............................................................. \$1,401,160 Less sales returns ......................................... (9,100 ) Net sales ........................................................ \$1,392,060 Estimated cost of goods sold [\$1,392,060 x (1 - 40%)] ............................. (835,236 ) Estimated March 31 inventory .......................... \$ 407,384 SERIAL PROBLEM SP 6 Serial Problem — SP 6, Success Systems (20 minutes)
Part A 1. Per Unit Total Total Inventory Items Units Cost Market Cost Market Office productivity ......... 3 \$ 76 \$ 74 \$228 \$222 Desktop publishing ........ 2 103 100 206 200 Accounting ..................... 3 90 96 270 288 Totals ............................. \$704 \$710 Assuming LCM is applied to the “whole of inventory,” the \$704 total cost of inventory is less than the \$710 total market value. Thus, Lopez would not adjust the currently reported inventory value of \$704.
Serial Problem — SP 6, Success Systems (concluded) 2. Per Unit Total Total LCM Applied Inventory Items Units Cost Market Cost Market To Items Office productivity ...... 3 \$ 76 \$ 74 \$228 \$222 \$222 Desktop publishing ..... 2 103 100 206 200 200 Accounting ................. 3 90 96 270 288 270 \$704 \$710 \$692 Assuming LCM is applied to the “items of inventory,” the \$692 market value (per items) is less than the \$704 total cost of inventory. Thus, Lopez must adjust the currently reported inventory value from \$704 to the LCM value of \$692. Part B 1. Ratio computations for the three months ended March 31, 2010: Inventory Turnover = Cost of Goods Sold / Average Inventory = \$14,052 / [(\$0 + \$704)/2] = 40 times (Since this is the first period of carrying inventory, it is acceptable to substitute ending inventory for average inventory. This would yield a turnover of 20 times .) Days’ Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365 = (\$704 / \$14,052) x 365 = 18.3 days 2. Success Systems outperforms its competitors on both ratios. Its inventory
turnover is 40 (or 20) times versus the competitors’ 10 times. Also, its days’ sales in inventory is 18.3 days versus competitors’ 29 days. Thus, Success Systems appears to be successfully managing its inventory.
Reporting in Action BTN 6-1 (\$ millions) 1. Ending inventories at March 3, 2007, were \$4,028. Ending inventories at February 25, 2006, were \$3,338. 2. 3/03/2007 = 0.297 or 29.7% 2/25/2006 = 0.281 or 28.1% 3. Best Buy’s inventories are the largest asset as of March 3, 2007 and as of February 25, 2006. Thus, merchandise inventories are a significant item for Best Buy and should command management’s attention. 4. From the notes to the financial statements, we see under “Merchandise inventories” that Best Buy’s inventories are carried at the lower of average cost or market. 5. a. Inventory turnover = Average inventory = \$ 4,028 \$13,570 \$3,338 + \$4,028 2
= \$3,683 Inventory turnover = = 7.4 times b. Days’ sales in inventory = x 365 = x 365 = 54.1 days 6. Solution depends on the financial statement information obtained. \$27,165 \$ 3,683 \$ 4,028 \$27,165
Comparative Analysis BTN 6-2 (\$ millions) 1. Inventory turnover = Best Buy — current year Inventory turnover = = 7.4 times Best Buy — one year prior Inventory turnover = = 7.5 times Circuit City — current year Inventory turnover = = 5.7 times \$27,165 (\$3,338 + \$4,028)/2 \$23,122 (\$2,851 + \$3,338)/2 \$9,501 (\$1,698 + \$1,637)/2
Circuit City — one year prior Inventory turnover = = 5.5 times RadioShack — current year Inventory turnover = = 3.0 times RadioShack — one year prior Inventory turnover = = 2.7 times