Question

The financial statements of M&S are presented in Appendix E. The company’s complete annual report, including the notes to the financial statements, is available online. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) How does M&S value its inventories? Which inventory costing method does M&S use as a basis for reporting its inventories? (b) How does M&S report its inventories in the statement of financial position? (c) What costs does M&S include in Inventory and Cost of Sales? (d) What was M&S’s inventory turnover in 2015? What is its gross profit percentage? Evaluate M&S’s inventory turnover and its gross profit percentage.

Short answer

(a) Lower of cost or net realizable value, weighted average cost method.

(b) Current assets

(c) Inventories£797.80 million, and cost of sales£6,325.90 million.

(d) Inventory turnover equals 7.70 times, and gross profit percentage equals 38.65%.

Step-by-step solution

Step-by-Step SolutionStep 1: Valuation of inventories

(a) Company report its’ inventories based on lower of cost or net realizable value. The weighted average cost method is used to report the inventories.

Reporting of inventories

(b) Inventories are reported as current assets under the assets section of the statement of financial position.

Inventory and cost of sales

(c) As of 28 March 2015, the Inventories balance equals £797.80 million, and the cost of sales equals £6,325.90 million.

Inventory turnover and gross profit percentage

Inventory turnover is calculated as follows:

$$\begin{gathered} \mathbf{Inventory}\mathbf{}\mathbf{Turn}\mathbf{}\mathbf{over}\mathbf{=}\frac{\mathrm{Cost}\mathrm{of}\mathrm{Sales}}{\frac{\mathrm{Beginning}\mathrm{Inventory}+\mathrm{Ending}\mathrm{Inventory}}{2}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{6}\mathbf{,}\mathbf{325}\mathbf{.}\mathbf{90}}{\frac{\mathbf{845}\mathbf{.}\mathbf{50}\mathbf{+}\mathbf{797}\mathbf{.}\mathbf{80}}{2}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{7}\mathbf{.}\mathbf{70} \end{gathered}$$

The gross profit percentage is calculated as follows:

$$\begin{gathered} \mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{}\mathbf{Percentage}\mathbf{=}\frac{\mathrm{Gross}\mathrm{Profit}}{\mathrm{Sales}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{3}\mathbf{,}\mathbf{985}\mathbf{.}\mathbf{50}}{\mathbf{10}\mathbf{,}\mathbf{311}\mathbf{.}\mathbf{40}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{38}\mathbf{.}\mathbf{65}\mathbf{\%} \end{gathered}$$