Consider the following inventory data for two companies: $\begin{array} { r r r }
&\text {Nichols, Inc.}&\text { Winters, Inc.}\
\text {Beginning inventory}&\$ 120,000 & \$ 150,000 \ \text{Ending inventory}&80,000 & 100,000 \ \text {Purchases}&240,000 & 310,000 \end{array}$ Which of these companies had the higher inventory turnover ratio?

Question

Consider the following inventory data for two companies: $\begin{array} { r r r } 
&\text {Nichols, Inc.}&\text { Winters, Inc.}\
\text {Beginning inventory}&\$ 120,000 & \$ 150,000 \ \text{Ending inventory}&80,000 & 100,000 \  \text {Purchases}&240,000 & 310,000 \end{array}$ Which of these companies had the higher inventory turnover ratio?

Quizplus · Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold (COGS) divided by average inventory. COGS can be calculated as Beginning Inventory + Purchases - Ending Inventory. For Nichols, COGS = $120,000 + $240,000 - $80,000 = $280,000. For Winters, COGS = $150,000 + $310,000 - $100,000 = $360,000. The average inventory for Nichols is ($120,000 + $80,000) / 2 = $100,000, and for Winters, it is ($150,000 + $100,000) / 2 = $125,000. The inventory turnover ratio for Nichols is $280,000 / $100,000 = 2.8, and for Winters, it is $360,000 / $125,000 = 2.88. Therefore, Winters has the higher inventory turnover ratio.

Consider the Following Inventory Data for Two Companies Which of These Companies Had the Higher Inventory Turnover Ratio