Inventory turnover and number of days’ sales in inventory

Financial statement data for years ending December 31 for Tango Company follow:

Line Item Description**20Y720Y6**Cost of goods sold

$3,864,000

$4,001,500

Inventories:  Beginning of year

770,000

740,000

  End of year

840,000

770,000

**Required**

**a.** Determine the inventory turnover for 20Y7 and 20Y6. **Round your answers to one decimal place.**



Line Item Description**20Y720Y6**Inventory turnover

fill in the blank 1 of 2

fill in the blank 2 of 2

**b.** Determine the days’ sales in inventory for 20Y7 and 20Y6. Use 365 days a year. **Round your answers to one decimal place.**



Line Item Description**20Y720Y6**Number of days’ sales in inventory

fill in the blank 1 of 2 days

fill in the blank 2 of 2 days


To calculate the inventory turnover and the number of days' sales in inventory, we'll follow these steps:

### Part (a): Inventory Turnover

The **inventory turnover** ratio is calculated using the formula:

\[
\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}
\]

Where:
\[
\text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}
\]

#### For 20Y7:
- **Cost of Goods Sold (COGS)** = \$3,864,000
- **Beginning Inventory** = \$770,000
- **Ending Inventory** = \$840,000

\[
\text{Average Inventory for 20Y7} = \frac{770,000 + 840,000}{2} = 805,000
\]

\[
\text{Inventory Turnover for 20Y7} = \frac{3,864,000}{805,000} \approx 4.8
\]

#### For 20Y6:
- **Cost of Goods Sold (COGS)** = \$4,001,500
- **Beginning Inventory** = \$740,000
- **Ending Inventory** = \$770,000

\[
\text{Average Inventory for 20Y6} = \frac{740,000 + 770,000}{2} = 755,000
\]

\[
\text{Inventory Turnover for 20Y6} = \frac{4,001,500}{755,000} \approx 5.3
\]

So, the inventory turnover ratios are:

- **20Y7:** 4.8
- **20Y6:** 5.3

### Part (b): Days' Sales in Inventory

The **days' sales in inventory** is calculated using the formula:

\[
\text{Days' Sales in Inventory} = \frac{365 \text{ days}}{\text{Inventory Turnover}}
\]

#### For 20Y7:
\[
\text{Days' Sales in Inventory for 20Y7} = \frac{365}{4.8} \approx 76.0 \text{ days}
\]

#### For 20Y6:
\[
\text{Days' Sales in Inventory for 20Y6} = \frac{365}{5.3} \approx 68.9 \text{ days}
\]

So, the number of days' sales in inventory are:

- **20Y7:** 76.0 days
- **20Y6:** 68.9 days

### Summary of Results:
- **20Y7 Inventory Turnover:** 4.8
- **20Y6 Inventory Turnover:** 5.3
- **20Y7 Days' Sales in Inventory:** 76.0 days
- **20Y6 Days' Sales in Inventory:** 68.9 days

Would you like more details on these calculations or have any questions?

### 5 Relative Questions:
1. How does a higher inventory turnover ratio impact a company's liquidity?
2. What could be the reasons for the decrease in inventory turnover from 20Y6 to 20Y7?
3. How does the number of days' sales in inventory affect the working capital of a company?
4. Can inventory turnover ratios be compared across different industries?
5. What strategies could a company employ to improve its inventory turnover ratio?

### Tip:
Regularly analyzing inventory turnover can help in identifying slow-moving products, which can improve inventory management and reduce holding costs.

Inventory turnover and number of days’ sales in inventory

Financial statement data for years ending December 31 for Tango Company follow:

Line Item Description**20Y720Y6**Cost of goods sold

$3,864,000

$4,001,500

Inventories:
  Beginning of year
770,000
740,000
  End of year
840,000
770,000

**Required**

**a.** Determine the inventory turnover for 20Y7 and 20Y6. **Round your answers to one decimal place.**

Line Item Description**20Y720Y6**Inventory turnover
fill in the blank 1 of 2
fill in the blank 2 of 2

**b.** Determine the days’ sales in inventory for 20Y7 and 20Y6. Use 365 days a year. **Round your answers to one decimal place.**

Line Item Description**20Y720Y6**Number of days’ sales in inventory
fill in the blank 1 of 2 days
fill in the blank 2 of 2 days

Learn how to calculate the inventory turnover and days' sales in inventory for Tango Company for the years 20Y7 and 20Y6. This solution covers key financial ratios, including inventory turnover and days' sales in inventory, with detailed formulas and calculations.

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