Question

Cruz Company uses LIFO for inventory costing and reports the following financial data. It also recomputed inventory and cost of goods sold using FIFO for comparison purposes.

	2017	2016
LIFO Inventory	\(160	\)110
LIFO Cost of goods sold	740	680
FIFO Inventory	240	110
FIFO Cost of goods sold	660	645
Current assets (Using LIFO)	220	180
Current liabilities	200	170

1. Compute its current ratio, inventory turnover, and days’ sales in inventory for 2017 using (a) LIFO numbers and (b) FIFO numbers. (Round answers to one decimal.)

Short answer

Ratio	LIFO Number	FIFO Number
Current ratio	1.1 times	1.5 times
Inventory Turnover	5.48 times	3.78 times
Days sales in inventory	66.6 days	96.56 days

Step-by-step solution

Definition of Inventory Turnover Ratio

The ratio reflecting the number of times a business entity has replaced its inventory through selling is known as the inventory turnover ratio.

Using LIFO numbers

Current ratio:

$\begin{array}{rcl}\mathrm{Current}\mathrm{Ratio}& =& \frac{\mathrm{Current}\mathrm{Assets}}{\mathrm{Current}\mathrm{Liabilities}}\\ & =& \frac{\$220}{\$200}\\ & =& 1.1\mathrm{times}\end{array}$

Inventory Turnover:

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}& =& \frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{inventory}}\\ & =& \frac{\$740}{{\displaystyle \frac{\$160+\$110}{2}}}\\ & =& 5.48\mathrm{times}\end{array}$

Days sales in inventory:

$\begin{array}{rcl}\mathrm{Days}\mathrm{sales}\mathrm{in}\mathrm{inventory}& =& \frac{365}{\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}}\\ & =& \frac{365}{5.48}\\ & =& 66.6\mathrm{days}\end{array}$

Using FIFO numbers

Current ratio:

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$220-\$160+\$240}{\$200}\\ & =& 1.5\mathrm{times}\end{array}$

Inventory Turnover:

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}& =& \frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{inventory}}\\ & =& \frac{\$660}{{\displaystyle \frac{\$240+\$110}{2}}}\\ & =& 3.78\mathrm{times}\end{array}$

Days sales in inventory:

$\begin{array}{rcl}\mathrm{Days}\mathrm{sales}\mathrm{in}\mathrm{inventory}& =& \frac{365}{\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}}\\ & =& \frac{365}{3.78}\\ & =& 96.56\mathrm{days}\end{array}$