Question

Question: Part B

Selected accounts and balances for the three months ended March 31, 2018, for Business Solutions follow:

January 1, Beginning Inventory	$0
Cost of goods sold	14,052
March 31, Ending Inventory	704

Required

1. Compute inventory turnover and days’ sales in inventory for the three months ended March 31, 2018.

2. Assess the company’s performance if competitors average 15 times for inventory turnover and 25 days for days’ sales in inventory.

Short answer

Answer

Inventory Turnover Ratio:39.92 times.

Days’ sales in inventory:9.14 days.

The company is performing well as compared to its competitor.

Step-by-step solution

Definition of Financial Ratios

Financial ratios are the metrics reflecting the performance of the business entity. It reflects financial performance by determining liquidity, solvency, and the profitability of the business entity.

Calculation of Financial Ratios

Inventory turnover ratio:

Inventory turnover ratio

$$\begin{gathered} =\frac{\cos tofgoodssold}{averageinventory} \\ =\frac{\$14,052}{{\displaystyle \frac{\$0+\$704}{2}}} \\ =\frac{\$14,052}{\$352} \\ =39.92times \end{gathered}$$

Days’ sales in inventory:

Days’ sales in inventor

$$\begin{gathered} =\frac{365}{inventoryturnoverratio} \\ =\frac{365}{39.92} \\ =914days \end{gathered}$$

Interpretation of Financial Results

According to the financial ratios, the company is performing excellently because the competitor can sell its inventory only 15 times while the company can sell its inventory 39.92 times in three months.

The company can sell its inventory in 9.14 days while the competitor sells its inventory in 25 days.