Financial Accounting.
Sample Solution
Inventory Management Analysis: [Chosen Company Name]
Company Selection:
[For this section, replace the bracketed text with the specific company you've chosen. Remember to ensure it generates revenue from selling goods and maintains inventory]
Inventory Turnover Ratio and Days' Sales in Inventory:
Year 1:
Data retrieved from the company's annual report (replace with specific figures from your chosen company's reports)
Cost of Goods Sold (COGS): $[Year 1 COGS] Average Inventory: $[Year 1 Average Inventory] (Calculated as Beginning Inventory + Ending Inventory / 2)
Inventory Turnover Ratio (Year 1) = COGS / Average Inventory = $[Year 1 COGS] / $[Year 1 Average Inventory]
Days' Sales in Inventory (Year 1):
Number of Days = 365 days / Inventory Turnover Ratio (Year 1) = 365 / [Inventory Turnover Ratio (Year 1)]
Year 2:
Data retrieved from the company's annual report (replace with specific figures from your chosen company's reports)
Cost of Goods Sold (COGS): $[Year 2 COGS] Average Inventory: $[Year 2 Average Inventory] (Calculated as Beginning Inventory + Ending Inventory / 2)
Inventory Turnover Ratio (Year 2) = COGS / Average Inventory = $[Year 2 COGS] / $[Year 2 Average Inventory]
Days' Sales in Inventory (Year 2):
Number of Days = 365 days / Inventory Turnover Ratio (Year 2) = 365 / [Inventory Turnover Ratio (Year 2)]
Industry Averages:
Using Mergent Online or another reliable source (specify the source you used), find the industry averages for inventory turnover ratio and days' sales in inventory for the chosen company's industry.
Full Answer Section
Analysis of Results:
- Inventory Turnover Ratio: A higher ratio indicates more efficient inventory management, meaning the company sells and replaces inventory more frequently.
- Days' Sales in Inventory: A lower number of days' sales in inventory suggests faster inventory turnover.
Comparison to Industry Average:
- Analyze how the company's inventory turnover ratio and days' sales in inventory compare to the industry averages for both years.
- Is the company above or below the industry average? By how much?
Causes of Changes (if any):
- If the ratios changed between Year 1 and Year 2, discuss the potential reasons for these changes.
- Possible factors could include changes in sales volume, production levels, or inventory management strategies.
Investor Satisfaction:
- Based on your analysis of the inventory turnover ratio and days' sales in inventory, express your opinion (as an investor) on whether you are satisfied with the company's inventory management.
- Justify your answer by explaining how the ratios compare to the industry average and how efficiently the company seems to be managing its inventory.
Note:
Replace the bracketed text with the specific details of your chosen company and retrieved data from its annual reports. Utilize Mergent Online or another credible source to find industry averages.
By completing this analysis, you'll gain valuable insights into the company's inventory management practices and how they compare to industry benchmarks. This information can be helpful for investors or anyone interested in the company's financial performance.