using the following information, calculate inventory turnover ratio, the average days in inventory, and the gross profit ratio for Howard Company for the year ended december 31, 2011( round to two decimal places) sales $225,00 Cost of goods $175,000 Ending inventory, December 31, 2011 $15,275 ending inventory decmber 31, 2010 $$18,750 net income $36,500
To calculate the inventory turnover ratio, you need to divide the cost of goods sold by the average inventory. The formula is:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
To find the average inventory, you add the beginning and ending inventory and divide by two:
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Given the information provided, let's calculate the average inventory first:
Beginning Inventory (2010) = $18,750
Ending Inventory (2011) = $15,275
Average Inventory = ($18,750 + $15,275) / 2 = $34,025 / 2 = $17,012.50
Now, let's calculate the inventory turnover ratio:
Cost of Goods Sold = $175,000
Inventory Turnover Ratio = $175,000 / $17,012.50 = 10.28
Next, to calculate the average days in inventory, you need to divide 365 days by the inventory turnover ratio:
Average Days in Inventory = 365 days / Inventory Turnover Ratio
Average Days in Inventory = 365 / 10.28 = 35.55 (rounded to two decimal places)
Finally, to calculate the gross profit ratio, divide the gross profit by the net sales:
Gross Profit Ratio = Gross Profit / Net Sales
Since the gross profit is not given, we can calculate it using the formula:
Gross Profit = Net Sales - Cost of Goods Sold
Net Sales = $225,000
Cost of Goods Sold = $175,000
Gross Profit = $225,000 - $175,000 = $50,000
Now we can calculate the gross profit ratio:
Gross Profit Ratio = $50,000 / $225,000 = 0.222 (rounded to two decimal places)
So, for Howard Company for the year ended December 31, 2011:
- The inventory turnover ratio is 10.28
- The average days in inventory is approximately 35.55 days
- The gross profit ratio is approximately 0.22 (or 22.2%)