financial ratios

Question 1

CLASSIFYING AND REPORTING INVENTORY

Answer 1

• Merchandiser buys its inventory – only one classification used - “Merchandise Inventory” (current asset)
• Typically recorded as a current asset, but can be non-current if not sold in one year

Question 2

ANALYSIS OF INVENTORY

Answer 2

• Excessive levels of inventory leads to high carrying costs
• Too little inventory may result in lost sales

Question 3

Ratios help determine:

Answer 3

• whether a company has too much or too little inventory:
• Inventory turnover ratio
• Days sales in inventory

Question 4

INVENTORY TURNOVER RATIO

Answer 4

Cost of Goods Sold ÷ Average Inventory
(two years add/2)

Question 5

inventory turnover

Answer 5

• The number of times inventory “turns over” during a given period
• The more times inventory turns over, the more efficiently sales are being made
• Average inventory is usually average of beginning and
  ending inventories

Question 6

DAYS SALES INVENTORY RATIO

Answer 6

= Days in Year(365)/ Inventory Turnover

Question 7

DAYS SALES INVENTORY

Answer 7

• The number of days on average that the inventory is on hand before being sold
• Compare over years and with industry averages