Question

Endor Company begins the year with \(140,000 of goods in inventory. At year-end, the amount in inventory has increased to \)180,000. Cost of goods sold for the year is $1,200,000. Compute Endor’s inventory turnover and days’ sales in inventory. Assume that there are 365 days in the year.

Short answer

Inventory turnover ratio:7.5 times

Day’s sales in inventory:48.66 days

Step-by-step solution

Step-By-Step SolutionStep 1: Definition of Day’s Sales in Inventory

A financial metric reflecting the time required by a business unit to sell its inventory to customers is known as a day’s sales in inventory. It is reflected in the number of days and calculated using the inventory turnover ratio.

Calculation of financial ratios

Inventory turnover ratio:

$$\begin{gathered} \mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}=\frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{Inventory}} \\ =\frac{\mathrm{\$}1,200,000}{\frac{\mathrm{\$}140,000+\mathrm{\$}180,000}{2}} \\ =7.5\mathrm{times} \end{gathered}$$

Day’s sales in inventory:

$$\begin{gathered} \mathrm{Days}\mathrm{sales}\mathrm{in}\mathrm{inventory}=\frac{365}{\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}} \\ =\frac{365}{7.5} \\ =48.66\mathrm{days} \end{gathered}$$