Consider a firm with a 2019 net income of $20 million, revenue of $60 million and cost of goods sold of $25 million. If the balance sheet amounts show $2 million of inventory and $500,000 of property, plant & equipment, how many weeks of supply does the firm hold?

Question

Quizplus · Accepted Answer

First, we need to calculate the inventory turnover ratio to determine how many times the inventory turned over during the year:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

We only have the ending inventory, which is $2 million, so we'll assume the beginning inventory is the same.

Average Inventory = ($2 million + $2 million) / 2 = $2 million

Inventory Turnover Ratio = $25 million / $2 million = 12.5

Next, we need to calculate the weeks of supply:

Weeks of Supply = 52 weeks / Inventory Turnover Ratio

Weeks of Supply = 52 weeks / 12.5 = 4.16 weeks

Therefore, the firm holds 4.16 weeks of supply. The best choice is E.

Consider a Firm with a 2019 Net Income of $20