Bowa Construction's days sales outstanding is 50 days (on a 365-day basis). The company's accounts receivable equal $100 million and its balance sheet shows inventory equal to $125 million. What is the company's inventory turnover ratio?
A) 5.84
B) 4.25
C) 3.33
D) 2.75
E) 7.25

Question

Quizplus · Accepted Answer

Inventory turnover ratio = (Cost of goods sold) / (Average inventory)Average inventory = (Beginning inventory + Ending inventory) / 2We don't have the cost of goods sold, but we can use the days sales outstanding to estimate it.Days sales outstanding = (Average accounts receivable) / (Sales)Sales = (Average accounts receivable) / (Days sales outstanding)Sales = $100 million / 50 days = $2 million per dayCost of goods sold = Sales - Gross profitWe don't have the gross profit, but we can assume that it is 50% of sales.Cost of goods sold = $2 million per day * 50% = $1 million per dayAverage inventory = ($125 million + $125 million) / 2 = $125 millionInventory turnover ratio = $1 million per day / $125 million = 5.84

Bowa Construction's Days Sales Outstanding Is 50 Days (On a 365-Day