Q 25E-1 - Horngren'S Financial And Managerial Accounting

Question

Calm Day reported the following income statement for the year ended December 31, 2019:

CALM DAY
Income Statement
Years Ended December 31, 2019
Net Sales Revenue		\( 128,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\) 9,000
Net Cost of Purchases	62,000
Cost of Goods Available for Sale	71,000
Less: Ending Merchandise Inventory	12,200
Cost of Goods Sold		58,800
Gross Profit		69,200
Operating Expenses		41,600
Net Income		$ 27,600

 

Requirements

1. Compute Calm Day’s inventory turnover rate for the year. (Round to two decimal places.)

Step-by-Step Solution

Answer

Inventory Turnover Ratio: 5.55

Step-by-Step-Solution Step 1: Inventory turnover

Inventory turnover is the rate of converting inventory into sales. It is the ratio of the total cost of issued or sold inventory to the average inventory. The average inventory provides a basis for comparing the cost of goods sold for the entire period.

Step 2: Inventory turnover rate or Calm Day

$$\begin{gathered} \mathit{A}\mathit{v}\mathit{e}\mathit{r}\mathit{a}\mathit{g}\mathit{e}\mathit{I}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathbf{=}\frac{\mathbf{O}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{+}\mathbf{C}\mathbf{l}\mathbf{o}\mathbf{s}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}{\mathbf{2}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{200}}{\mathbf{2}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{200}}{\mathbf{2}} \\ \mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{600} \end{gathered}$$