Question

Use the following information for Shafer Company to compute inventory turnover for year 2.

Year 2 Year 1
Net sales $656,000 $584,600
Cost of goods sold 390,200 361,010
Ending inventory 79,400 81,080

Answer 1

The inventory turnover ratio for Shafer Company in year 2 is approximately 4.86 times. This measurement reflects how often the company's inventory is sold and replaced over the period. For the self-check question, the firm's accounting profit was $50,000 last year.

Step-by-step explanation:

To calculate the inventory turnover ratio for Shafer Company in year 2, we use the following formula:

Inventory Turnover

= Cost of Goods Sold / Average Inventory
The Cost of Goods Sold (COGS) for year 2 is $390,200. To find the Average Inventory, we calculate the mean between Year 2's ending inventory and Year 1's ending inventory:

Ending Inventory Year 2: $79,400

Ending Inventory Year 1: $81,080

Average Inventory = (Year 2 Ending Inventory + Year 1 Ending Inventory) / 2

Average Inventory = ($79,400 + $81,080) / 2

Average Inventory = $160,480 / 2

Average Inventory = $80,240

Inventory Turnover = $390,200 / $80,240

Inventory Turnover = 4.86 (rounded to two decimal places)

Therefore, the inventory turnover ratio for Shafer Company in year 2 is approximately 4.86 times.

Self-Check Question Answered

For the self-check question, to find the accounting profit, we subtract the total costs from the sales revenue:

Accounting Profit = Sales Revenue - (Labor Costs + Capital Costs + Materials Costs)

Accounting Profit = $1,000,000 - ($600,000 + $150,000 + $200,000)

Accounting Profit = $1,000,000 - $950,000

Accounting Profit = $50,000

The firm's accounting profit for last year was $50,000.

Answer 2

Inventory turnover for year 2 is 4.91 times.

Step-by-step explanation:

Inventory turnover measures liquidity of company`s inventory

Inventory turnover = Cost of goods sold / Ending inventory

= $390,200 / $79,400

= 4.91 times