University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

128

Pages:

1
Author:

stud_ice13

Inventory Turnover: • • • Definition: Inventory turnover measures how many times a company sells and replaces its inventory during a period. Purpose: It evaluates how effectively management controls inventory levels. A low turnover indicates potential overstock or difficulty in selling, while a high turnover suggests good sales but could risk running out of stock, which may lead to lost sales. Interpretation: While a high ratio is generally preferred, it should still be adequate to meet demand. There is no strict rule for what constitutes an ideal ratio, as it varies by industry. Days’ Sales in Inventory: • • • Definition: This ratio shows how many days of sales can be made from the current inventory without restocking. Purpose: It helps assess the buffer of available inventory and how quickly a company is selling its stock. Key Difference: It uses ending inventory, whereas inventory turnover uses average inventory. Application to Costco and Walmart: • Costco’s inventory turnover of 11.8 times per year outperforms Walmart’s, indicating more efficient inventory management, provided stockouts are avoided. Costco’s days’ sales in inventory of 31.3 days implies a sufficient inventory buffer without over-tying capital. Comparative Example: An entrepreneur’s retail store has an inventory turnover of 5.0 and days’ sales in inventory of 73 days. Both metrics compare favorably with the industry norms (4.4 turnover and 74 days), suggesting the store could consider reducing inventory while maintaining good service. Inventory Valuation Methods (FIFO, LIFO, WA, SI): • The text also covers inventory valuation methods like FIFO (First-In, First-Out), LIFO (Last-In, First-Out), Weighted Average (WA), and Specific Identification (SI). Each method impacts the cost of goods sold (COGS) and gross profit differently. An error in using LIFO instead of FIFO can lead to incorrect financial statements by overstating COGS and understating income in the current year, with the reverse effect in the next year.