Question

Use the following information for Palmer Co. to compute inventory turnover for 2017 and 2016, and its days’ sales in inventory at December 31, 2017 and 2016. (Round answers to one decimal.) Comment on Palmer’s efficiency in using its assets to increase sales from 2016 to 2017.

	2017	2016	2015
Cost of goods sold	\(643,825	\)426,650	$391,300
Ending Inventory	97,400	87,750	92,500

Short answer

Year	Inventory turnover ratio	Days sales in inventory
2016	4.73 times	77 days
2017	6.95 times	53 days

Step-by-step solution

Definition of Liquidity

A characteristic that reflects the repayment ability is known as liquidity. It covers the short-term repayments only. It is determined using various financial ratios, such as the current ratio.

Calculation of Financial Ratios for 2016

Inventory turnover ratio
$$\begin{gathered} \mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}=\frac{\mathrm{cost}of\mathrm{good}\mathrm{sales}}{\mathrm{average}\mathrm{inventory}} \\ =\frac{\$426,650}{{\displaystyle \frac{\$292,500+\$87,750}{2}}} \\ =\frac{\$426,650}{\$90,125} \\ =4.73\mathrm{times} \end{gathered}$$

Days sales in inventory

$$\begin{gathered} \mathrm{Days}\mathrm{sales}\mathrm{in}\mathrm{inventory}=\frac{365}{\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}} \\ =\frac{365}{4.73} \\ =77\mathrm{days} \end{gathered}$$

Calculation of Financial Ratios for 2017

Inventory turnover ratio

$$\begin{gathered} \mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}=\frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{Inventory}} \\ =\frac{\$643,825}{{\displaystyle \frac{\$87,750+\$97,400}{2}}} \\ =\frac{\$643,825}{\$92,575} \\ =6.95\mathrm{times} \end{gathered}$$

Days sales in inventory

$$\begin{gathered} \mathrm{Days}\mathrm{sales}\mathrm{in}\mathrm{inventory}=\frac{365}{\mathrm{Average}\mathrm{Inventory}} \\ =\frac{365}{6.95} \\ =53\mathrm{days} \end{gathered}$$