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muskhere
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Joined: 23 Oct 2009
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Posts: 61

Posted: 15 Nov 2009 at 22:55 \| IP Logged

To measure inventory management performance, a company monitors its inventory turnover ratio. Listed
below are selected data from the company's accounting records:
Current year Prior year
Annual sales $2,525,000 $2,125,000
Gross profit percent 40% 35%
Beginning finished goods inventory for the current year was 15% of the prior-year's annual sales volume
at cost, and ending finished goods inventory was 22% of the current-year's annual sales volume at cost.
What was the company's inventory turnover at the end of the current period?
a. 4.55
b. 6.21
c. 6.51
d. 6.81
Solution:
Choice "d" is correct.

i am getting calculation wrong.Kindly solve..

VAAL412
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Joined: 26 Sep 2009
Location: United States
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Posts: 46

Posted: 15 Nov 2009 at 23:14 \| IP Logged

Check the AICPA 2009 released questions- #33 . Answer is 5.61

micky201314
Major Contributor

Joined: 11 Oct 2009
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Posts: 396

Posted: 15 Nov 2009 at 23:17 \| IP Logged

darn it~ I kept getting 5.61 and can't find a match answer there!

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muskhere
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Joined: 23 Oct 2009
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Posts: 61

Posted: 15 Nov 2009 at 23:23 \| IP Logged

i think they have messed here

Choice "d" is correct. The inventory turnover is 6.81. The problem requires computation of the elements
of inventory turnover (average inventory and cost of goods sold) from the fact pattern to compute the
ratio.
The current year cost of goods sold is equal to Sales x (1 - Gross profit percent), as follows:
$2,525,000 x .6 (1 - .4) = $1,515,000
Inventory is given as a percentage of sales. Current year-ending inventory is 22% of current year sales.
Ending inventory is $333,300 ($1,515,000 x 22%) while beginning inventory is 15% of prior year sales,
thus beginning inventory is $111,563 [($2,125,000 x .65 (1-.35)) x 15%]. ( i think .65 not reqd? kindly explain this)
Average inventory is computed as the sum of beginning and ending inventory divided by two, as follows:
($333,300 + $111,563) ÷ 2 = $222,431
Inventory turnover is the ratio of cost of goods sold to average inventory, computed as follows:
$1,515,000 ÷ $222,431 = 6.81

micky201314
Major Contributor

Joined: 11 Oct 2009
Online Status: Offline
Posts: 396

Posted: 15 Nov 2009 at 23:28 \| IP Logged

thus beginning inventory is $111,563 [($2,125,000 x .65 (1-.35)) x 15%].

I see why they get wrong.

2125000*0.65 * 0.15 should be equal to 207187.5, not 111,563!

The formula is right, they got the answer wrong.

0.65 is required because this process is same as .6 in calculating current year inventory

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BEC-Finished Good 90
AUD-Finished Good 84
FAR-Finished Good 91

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