Corporate Financial Accounting Study Set 3

Business

Quiz 6 :
Inventories

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Quiz 6 :
Inventories

Inventory Turnover Ratio This ratio indicates the relationship of sales valued at cost with inventory level in times. It simply defines the rate from which the inventory converts into cash or credit sales. In the present case, Companies A and T are competing for consumers of their products in internet retailer business. A Computation of inventory turnover ratio can be done by using the formula given below. img The average inventory value can be computed by using the formula given under. img On putting the values in the formula of average inventory the results are given as under. For company A img For company T img Now, the ITR ratio can be computed by putting the values of average inventory as given below. img Hence, the inventory turnover ratio of company A is img img Hence, the inventory turnover ratio of company T is img B Computation of number of days' sales in inventory can be done by using the formula given below. img In the given case average daily COGS is calculated by dividing the COGS value of each company with 365 days. img img By putting the values in above formula the results are given as under. For company A img For company T img Hence, the number of days' sales in inventory for company A is img and for company T is img C Company A has inventory turnover ratio of 7.9 times. Generally higher the inventory indicates the better the efficiency. Hence, inventory efficiency of company A is better. D The number of days' sales is also better in case of company A stands at 45.7 days which indicates the higher sales than the company T. Although the average inventory of the company T is more than the company A which shows the excess level of inventory holding by former company. Hence, it can be said that the company A has better efficiency level of inventory.

Gross profit is amount of profit generated from the direct production of a product. In other words, gross profit is total sales net of returns minus cost of goods sold net of stock in hand at beginning and end.Gross profit can change due to change in cost of goods sold. Cost of goods sold is depending on the method of valuation of inventory. For purpose of valuation of inventory there are three methods naming FIFO, LIFO and Weighted average method.Calculation of gross profit is given as below;- img In above sale price of sales made on April, 27 is $300 and in case of FIFO method, First inventory is out for sale first. So, purchase made on April, 2 is sold whose cost is $100. In case of LIFO method, last inventory purchased is out first carrying cost $140. Whereas, weighted average cost means sum of price of all units divided by no. of units. Amount comes is $120 img . Accordingly computed profit is gross profit by deducting different cost value from sales under different methods used.a.Calculation of inventory as on 30 th April as per FIFO img FIFO method, First inventory is out for sale first. In above case sold goods are from lot of purchase of April, 02.b.Calculation of inventory as on 30 th April as per LIFO img LIFO method, last inventory purchased is out first. In above case sold goods are from lot of purchase of April, 27. c.Calculation of inventory as on 30 th April as per Weighted Average img

Inventory purchases: Inventory purchases mean the inventory that has been purchased from outside vendors as per the requirements of production. The amount of inventory purchases to be recorded in the books of accounts is the cost incurred to purchase the inventory. Cost incurred to purchase inventory is the cost paid to the vendor for acquiring the inventory. Accounting for inventory purchases: Before recording the amount of inventory purchases in the books of accounts, the receiving report of the inventory is to be reconciled with the relevant documents. It is reconciled to record the purchase at correct amount. The relevant documents used to reconcile with the receiving report are purchase order and the vendor invoice. The purchase order is the order of the requirements of the inventory made by the company to vendor. Vendor invoice is the invoice sent by the vendor for the amount due by the company. The purchase order and the vendor invoice is reconciled with the receiving report because the excess inventory or the less inventory received will be returned or additional order can be raised to the vendor. If the inventory received is not as per the requirements of the company then it will be returned to the vendor. This process of reconciliation is adapted in order to avoid many entries in the books of accounts. Thus, the relevant documents to reconcile with the receiving report are purchase order and vendor invoice.