Bell Company has provided the following figures as of December 31, Year 2: sales of $600,000, cost of goods sold of $320,000, net income of $120,000, and ending inventory of $64,000. Indicate whether each of the above statements pertaining to the Bell Company is true or false. ________ a) Bell's inventory turnover is 5.0. ________ b) Bell's average number of days to sell inventory ratio is 39.5. ________ c) Bell could increase its inventory turnover by increasing prices. ________ d) Bell's gross margin as a percentage of sales was 46.7%. ________ e) A local competitor in the same line of business has an inventory turnover of 3.5. Assuming each firm has approximately the same gross margin rate, Bell Company is likely to be more profitable than the competitor.

Question

What will be an ideal response?

Answer 1

a) T b) F c) F d) T e) T 

a) This is true. Inventory turnover = Cost of goods sold of $320,000 ÷ Inventory of $64,000 = 5.0.
b) This is false. Average number of days to sell inventory = 365 days ÷ Inventory turnover of 5.0 = 73 days.
c) This is false. Inventory turnover is calculated by dividing cost of goods sold by inventory. Furthermore, increasing prices could cause inventory to sell more slowly.
d) This is true. Gross margin = Sales of $600,000 ? Cost of goods sold of $320,000 = $280,000; Gross margin percentage = Gross margin of $280,000 ÷ Sales of $600,000 = 46.7%.
e) This is true. With an inventory turnover ratio of 5.0, Bell Company turns its inventory more quickly than the competitor, and thus is likely to be more profitable than the competitor.