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Chapter 6: 13RQ (page 357)

How is inventory turnover calculated, and what does it measure?

Short Answer

Expert verified

Inventory turnover is calculated to measure the number of times inventory is converted to sale by comparing the cost of sold inventory against average inventory.

Step by step solution

01

Inventory turnover

Inventory turnover is the ratio between the cost of goods sold and average inventory. It is computed in the following way –

Inventoryturnover=CostofgoodssoldAverageInventoryAverageInventory=OpeningInventory+ClosingInventory2

02

Inventory turnover measurement

Inventory turnover measures the number of times inventory is sold during a particular period. This is computed by comparing the sold inventory against the average inventory for the period.

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Most popular questions from this chapter

Question:Ward Hardware does not expect costs to change dramatically and wants to use an inventory costing method that averages cost changes.

Requirements

1. Which inventory costing method would best meet Ward’s goal?

2. Assume Ward wanted to expense out the newer purchases of goods instead.

Which inventory costing method would best meet that need?

Question:Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

2. Which inventory costing method produced the highest cost of goods sold?

How is days’ sales in inventory calculated, and what does it measure?

Steel It began January with 55 units of iron inventory that cost \(35 each. During January, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Jan. 3 Sale 45 \) 83

8 Purchase 75 $ 52

21 Sale 70 85

30 Purchase 10 55

Requirements

3. Prepare a perpetual inventory record for the merchandise inventory using theweighted-average inventory costing method.

Discuss the materiality concept. Is the dollar amount that is material the same for a company that has annual sales of \(10,000 compared with a company that has annual sales of \)1,000,000?
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