Cost of sales divided by average inventory equals inventory turnover. The problem tells us what the inventory turnover is, and if we can find what average inventory is, we can calculate the cost of sales. We have the beginning inventory balance. To find what average inventory is, we need to know the ending inventory balance so we can take their average. If the current liabilities are $600,000 and the current ratio is 3.5, that means that current assets are $2,100,000 ($600,000 × 3.5). Given an acid test ratio of 3.0 and current liabilities of $600,000, we know that the numerator of the quick ratio is $1,800,000 ($600,000 × 3.0). The primary difference between the numerator of the current ratio and the numerator of the quick ratio is inventory. Thus, ending inventory is $300,000 ($2,100,000 ? $1,800,000). Since ending inventory was $300,000 and beginning inventory was $500,000, we can calculate that we have an average inventory of $400,000. Now we have both inventory turnover and average inventory. Inventory turnover is calculated as cost of sales divided by average inventory. Using the inventory turnover of 8, we know that the cost of sales was 8 times the average inventory of $400,000, or $3,200,000.
This is (Beginning Inventory ? Ending Inventory) × 8. The inventory turnover ratio (8.0) needs to be multiplied by average inventory, which is (Beginning Inventory + Ending Inventory) ÷ 2.
This is (Beginning Inventory + Ending Inventory) × 8. The inventory turnover ratio (8.0) needs to be multiplied by average inventory, which is (Beginning Inventory + Ending Inventory) ÷ 2.
This is Ending Inventory × 8. The inventory turnover ratio (8.0) needs to be multiplied by average inventory, which is (Beginning Inventory + Ending Inventory) ÷ 2.
|
