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

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


2014 2013
Cost of merchandise sold $3,864,000 $4,001,500
Inventories:
Beginning of year 770,000 740,000
 End of year 840,000 770,000

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
$3,864,000 $4,001,500
$770,000 $740,000
$840,000 $770,000
$805,000 $755,000
[($770,000 + $840,000) ÷ 2] [($740,000 + $770,000) ÷ 2]
4.8 5.3
($3,864,000 ÷ $805,000) ($4,001,500 ÷ $755,000)
Number of Days’ Sales
b. in Inventory 2014 2013
Cost of merchandise sold
Average daily cost of
$3,864,000 $4,001,500
merchandise sold
Average inventory
Number of days’ sales in
inventory
$10,586.3 $10,963.0
($3,864,000 ÷ 365 days) ($4,001,500 ÷ 365 days)
$805,000 $755,000
[($770,000 + $840,000) ÷ 2] [($740,000 + $770,000) ÷ 2]
76.0 days 68.9 days
($805,000 ÷ $10,586.3) ($755,000 ÷ $10,963.0)
c. The decrease in the inventory turnover from 5.3 to 4.8 and the increase in the
number of days’ sales in inventory from 68.9 days to 76.0 days indicate
unfavorable trends in managing inventory.