Inventory turnover ratio = Cost of goods sold Question:
Average inventory The
following
$1,840,000 is a
=
portion of
[$690,000 + 630,000] ÷ 2
the
condensed
= 2.79 times
income statement for Rowan, Inc., a manufacturer of plastic containers:
Net sales $2,460,000
Less: Cost of goods sold:
Inventory, January 1 $ 630,000
Net purchases 1,900,000
Inventory, December 31 (690,000) 1,840,000
Gross profit $ 620,000
Required:
1. Determine Rowan’s inventory turnover.
2. What information does this ratio provide?
Answer:
Requirement 1
Requirement 2
By itself, this one ratio provides very little information. In general, the higher the inventory
turnover, the lower the investment must be for a given level of sales. It indicates how well inventory
levels are managed and the quality of inventory, including the existence of obsolete or overpriced
inventory.
Average inventory The
following
$1,840,000 is a
=
portion of
[$690,000 + 630,000] ÷ 2
the
condensed
= 2.79 times
income statement for Rowan, Inc., a manufacturer of plastic containers:
Net sales $2,460,000
Less: Cost of goods sold:
Inventory, January 1 $ 630,000
Net purchases 1,900,000
Inventory, December 31 (690,000) 1,840,000
Gross profit $ 620,000
Required:
1. Determine Rowan’s inventory turnover.
2. What information does this ratio provide?
Answer:
Requirement 1
Requirement 2
By itself, this one ratio provides very little information. In general, the higher the inventory
turnover, the lower the investment must be for a given level of sales. It indicates how well inventory
levels are managed and the quality of inventory, including the existence of obsolete or overpriced
inventory.
