A ﬁrm has sales of $720,000. The cost of goods sold is equal to 70% of sales. The ﬁrm has an average inventory of $6,500. How many days on average does it take the ﬁrm to sell its inventory?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold which is equal to 70% of $720,000:

Cost of Goods Sold = 0.70 x $720,000 = $504,000

Next, we need to use the inventory turnover ratio to calculate the number of days it takes the firm to sell its inventory:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

We have the cost of goods sold as $504,000 and the average inventory as $6,500, so:

Inventory Turnover Ratio = $504,000 / $6,500 = 77.54

So, the firm takes 77.54 days to sell its inventory on average, which means the best choice is B: 4.71 days.

Note: This means the firm sells its entire inventory about 7.76 times per year (365 days / 77.54 days per turnover), so on average, they keep their inventory for about 47 days (365 days / 7.76 turnovers per year).

A ﬁRm Has Sales of $720,000