Inventory Turnover Ratio: 2022 vs 2023

The Inventory Turnover Ratio measures how efficiently a company turns its inventory into sales. The formula is:

$\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}$

Where:

• Cost of Goods Sold (COGS) represents the cost incurred to produce the goods that the company sells.
• Average Inventory is the average of the inventory at the beginning and end of the year:

$\text{Average Inventory} = \frac{\text{Inventory at Beginning of Year} + \text{Inventory at End of Year}}{2}$

Step 1: Calculate Average Inventory

For 2023: $\text{Average Inventory (2023)} = \frac{₱750,000 + ₱800,000}{2} = ₱775,000$

For 2022: $\text{Average Inventory (2022)} = \frac{\text{Previous Year's Inventory} + \text{2022 Inventory}}{2}$ Since we don't have the inventory at the start of 2022, we’ll assume the ending inventory for 2021 is ₱700,000: $\text{Average Inventory (2022)} = \frac{₱700,000 + ₱750,000}{2} = ₱725,000$

Step 2: Calculate Inventory Turnover Ratio

For 2023: $\text{Inventory Turnover (2023)} = \frac{₱3,000,000}{₱775,000} = 3.87 \text{ times}$

For 2022: $\text{Inventory Turnover (2022)} = \frac{₱2,900,000}{₱725,000} = 4.00 \text{ times}$

Interpretation

• 2023: GO Corporation turned over its inventory 3.87 times during the year.
• 2022: The inventory turnover ratio was higher, at 4.00 times.

The decrease in the inventory turnover ratio from 4.00 to 3.87 suggests that GO Corporation was slightly less efficient at converting its inventory into sales in 2023 compared to 2022. This could indicate either slower sales, higher inventory levels, or both.

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Do you need more details or have any questions?

Here are some related questions to further analyze GO Corporation's performance:

1. How does the inventory turnover ratio compare with industry standards?
2. What is the impact of operating expenses on profitability in 2023 vs 2022?
3. How does the company’s liquidity (e.g., current ratio) compare between 2022 and 2023?
4. How did changes in total assets affect asset turnover ratios between the two years?
5. How does the company's debt-to-equity ratio impact financial stability in 2023?

Tip: A lower inventory turnover could indicate a need to review inventory management practices to avoid tying up too much capital in unsold stock.