The following financial statement data for years ending December 31 for Holland Company are shown below.

The following financial statement data for years ending December 31 for Holland Company are shown below.


2014 2013
Cost of merchandise sold $1,452,500 $1,120,000 Inventories:
Beginning of year 380,000 320,000
 End of year 450,000 380,000


a. Determine the inventory turnover for 2014 and 2013.

b. Determine the number of days’ sales in inventory for 2014 and 2013. Round to one decimal place.

c. Does the change in inventory turnover and the number of days’ sales in inventory from 2013 to 2014 indicate a favorable or an unfavorable trend?


Answer:

a. Inventory Turnover 2014 2013
Cost of merchandise sold
Inventories:
Beginning of year
End of year
Average inventory
Inventory turnover
$1,452,500 $1,120,000
$380,000 $320,000
$450,000 $380,000
$415,000 $350,000
[($380,000 + $450,000) ÷ 2] [($320,000 + $380,000) ÷ 2]
3.5 3.2
($1,452,500 ÷ $415,000) ($1,120,000 ÷ $350,000)
Number of Days’ Sales
b. in Inventory 2014 2013
Cost of merchandise sold
Average daily cost of
merchandise sold
Average inventory
Number of days’ sales in
inventory
$1,452,500 $1,120,000
$3,979.5 $3,068.5
($1,452,500 ÷ 365 days) ($1,120,000 ÷ 365 days)
$415,000 $350,000
[($380,000 + $450,000) ÷ 2] [($320,000 + $380,000) ÷ 2]
104.3 days 114.1 days
($415,000 ÷ $3,979.5) ($350,000 ÷ $3,068.5)
c. The increase in the inventory turnover from 3.2 to 3.5 and the decrease in the
number of days’ sales in inventory from 114.1 days to 104.3 days indicate
favorable trends in managing inventory.