Asked by Harpreet Kaur Dhillon on May 07, 2024
Verified
Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.The inventory turnover ratio is closest to:
A) 2.78
B) 9.27
C) 6.49
D) 2.89
Inventory Turnover Ratio
A measure of how often a company sells and replaces its stock of goods during a period, calculated as cost of goods sold divided by average inventory.
Gross Profit
The difference between revenue and the cost of goods sold before deducting overhead, payroll, taxation, and interest payments.
Net Sales
Revenue from goods or services sold minus returns, allowances, and discounts.
- Identify and examine the inventory turnover ratio.
Verified Answer
WL
Watson LewisMay 10, 2024
Final Answer :
C
Explanation :
Inventory turnover ratio measures how efficiently a company is managing its inventory by calculating the number of times the inventory is sold and replaced during a period. It is calculated by dividing the cost of goods sold by the average inventory.
Average inventory = (Beginning inventory + Ending inventory)/2
= ($110,000 + $102,000)/2
= $106,000
Cost of goods sold = Net sales - Gross profit
= $983,000 - $295,000
= $688,000
Inventory turnover ratio = Cost of goods sold/Average inventory
= $688,000/$106,000
= 6.49
Therefore, the closest answer is choice C.
Average inventory = (Beginning inventory + Ending inventory)/2
= ($110,000 + $102,000)/2
= $106,000
Cost of goods sold = Net sales - Gross profit
= $983,000 - $295,000
= $688,000
Inventory turnover ratio = Cost of goods sold/Average inventory
= $688,000/$106,000
= 6.49
Therefore, the closest answer is choice C.
Learning Objectives
- Identify and examine the inventory turnover ratio.