# Inventory turnover measures the number of times on

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Inventory turnover measures the number of times on average the in- ventory is sold during the period. Its purpose is to measure the liquidity of the inventory. The inventory turnover is computed by dividing cost of goods sold by the average inventory during the period. Unless seasonal factors are significant, average inventory can be computed from the beginning and ending inventory balances. For example, Wal-Mart reported in its 2008 an- nual report a beginning inventory of \$33,685 million, an ending inventory of \$35,180 million, and cost of goods sold for the year ended January 31, 2008, of \$286,515 million. The inventory turnover formula and computation for Wal-Mart are shown below. Compute and interpret the inventory turnover ratio. S T U D Y O B J E C T I V E 6 Cost of Goods Sold H11548 Average Inventory H11549 Inventory Turnover \$286,515 H11004 H11005 8.3 times \$33,685 H11001 \$35,180 H5007H5007H5007 2 Illustration 6-21 Inventory turnover formula and computation for Wal-Mart PDF Watermark Remover DEMO : Purchase from to remove the watermark

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Statement Presentation and Analysis 267 A variant of the inventory turnover ratio is days in inventory .This measures the average number of days inventory is held. It is calculated as 365 divided by the in- ventory turnover ratio. For example, Wal-Mart’s inventory turnover of 8.3 times di- vided into 365 is approximately 44 days.This is the approximate time that it takes a company to sell the inventory once it arrives at the store. There are typical levels of inventory in every industry. Companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy cus- tomer needs are the most successful. DO IT! INVENTORY TURNOVER action plan a20 To find the inventory turnover ratio, divide cost of goods sold by average inventory. a20 To determine days in inventory, divide 365 days by the inventory turnover ratio. a20 Just-in-time inventory reduces the amount of inventory on hand, which reduces carrying costs. Reducing inventory levels by too much has potential negative implications for sales. The Navigator a19 Early in 2010 Westmoreland Company switched to a just-in-time inventory system. Its sales, cost of goods sold, and inventory amounts for 2009 and 2010 are shown below. 2009 2010 Sales \$2,000,000 \$1,800,000 Cost of goods sold 1,000,000 910,000 Beginning inventory 290,000 210,000 Ending inventory 210,000 50,000 Determine the inventory turnover and days in inventory for 2009 and 2010. Discuss the changes in the amount of inventory, the inventory turnover and days in inven- tory, and the amount of sales across the two years. Solution 2009 2010 Inventory turnover \$1,000,000 H11005 4 \$ 910,000 H11005 7 ratio (\$290,000 H11001 \$210,000)/2 (\$210,000 H11001 \$50,000)/2 Days in 365 H11004 4 H11005 91.3 days 365 H11004 7 H11005 52.1 days inventory The company experienced a very significant decline in its ending inventory as a re- sult of the just-in-time inventory. This decline improved its inventory turnover ra- tio and its days in inventory. However, its sales declined by 10%. It is possible that this decline was caused by the dramatic reduction in the amount of inventory that was on hand, which increased the likelihood of “stock-outs.” To determine the op-
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