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

c. What conclusions can you draw from part a and part b?

Short answer

Based on the sales, the turnover has remained constant at 10 times for 20X1 and 20X2. However, based on the cost of goods sold, the ratio has improved from 7.5 times in 20X1 to 9 times in 20X2. It is so because the cost of goods sold has gone up as the percentage of sales increased from 7.5 per cent to 9 per cent; however, the inventory has not increased as faster as the cost of goods sold.

Step-by-step solution

Comparision of Inventory turnover ratio by dividing sales to inventory from part a

	20X1	20X2
Inventory turnover ratio (Sales)	10	10

$Inventoryturnoverratio=\frac{Sales}{Inventory\cos ts}$

The inventory turnover ratio in both years is similar because the increment ratio of both inventory and sales is the same.

Comparision of Inventory turnover ratio by dividing Cost of goods sold to inventory from part b

	20X1	20X2
Inventory turnover ratio (Cost of goods sold)	7.5	9

$Inventory\mathit{}cost\mathit{}\mathit{=}\mathit{}\frac{\mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathit{}\mathit{o}\mathit{f}\mathit{}\mathit{g}\mathit{o}\mathit{o}\mathit{d}\mathit{s}\mathit{}\mathit{s}\mathit{o}\mathit{l}\mathit{d}}{\mathit{I}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathit{}\mathit{c}\mathit{o}\mathit{s}\mathit{t}}$

The inventory turnover ratio calculated by using the cost of goods sold has increased in 20X2 in comparison to 20X1 because the rate of increase In the cost of goods sold is higher than that of the inventory.