Question

Perez Corporation has the following financial data for the years 20X1 and 20X2:

	20X1	20X2
Sales	\(8,000,000	\)10,000,000
Cost of goods sold	6,000,000	9,000,000
Inventory	800,000	1,000,000

b. Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods sold/Inventory, for each year.

Short answer

The Inventory Turnover ratio for 20X1 and 20X2 is 7.5 and 9, respectively.

Step-by-step solution

Inventory turnover ratio for the year 20X1 

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}& =& \frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Inventory}}\\ & =& \frac{\$6,000,000}{\$800,000}\\ & =& 7.5\end{array}$

Inventory turnover ratio for the year 20X2 

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}\mathrm{ratio}& =& \frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Inventory}}\\ & =& \frac{\$9,000,000}{\$1,000,000}\\ & =& 9\end{array}$