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

Question

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

Quizplus · Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold (COGS) divided by Average Inventory. For both companies, COGS can be estimated as Beginning Inventory + Purchases - Ending Inventory. For Nichols Inc., COGS = $120,000 + $240,000 - $80,000 = $280,000, and Average Inventory = ($120,000 + $80,000) / 2 = $100,000, giving a turnover ratio of 2.8. For Winters Inc., COGS = $150,000 + $310,000 - $100,000 = $360,000, and Average Inventory = ($150,000 + $100,000) / 2 = $125,000, giving a turnover ratio of 2.88. Thus, Winters Inc. had the higher inventory turnover ratio.

Consider the Following Inventory Data for Two Companies: Which of These