Comm 217 past exam

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Chapter 8: Reporting and interpreting cost of sales and inventory

8.1 Estimate the amount of inventories that your company purchased and produced during the current year. (Hint: use the cost of sales equation.)

For the amount of inventories that Loblaw purchased and produced during the current year, we need to find the purchases of the period by using the equation of the cost of sales (BI + P – EI = COS). In the report, we can find the cost of sales (24 185 million) that we add to the ending inventory (2 007 million) and then we have to subtract the beginning inventory (2025 million). This equation gives us the total purchases of the period which is 24 167 million.

With the equation of cost of sales,

Cost of sales24 185 million
+ Ending inventories 2007 million
- Beginning inventory2025 million
= Purchases = 24 167 million

8.2 What inventory costing method does the company use? Why do you think the company made this choice?

As reported on the report of Loblaws, they are planning on upgrading their information technology system and converting to the use of the perpetual inventory system. The company is going to estimate the value of their inventories in the stores by using the weighted average cost method. The seasonal merchandise and the inventories at the distribution center are determined by using the weighted average cost method as well. Why?

Because the company has an inventory that is not really changing considering they receive almost always the same food products period after period, using the weighted average method might be more useful considering that it evens out the variation of the costs of the food products they sell.

8.3 Ratio analysis:
a. What do the inventory turnover ratio and the average days to sell inventory measure in general?

“The inventory turnover ratio reflects how many times the average inventory was produced and sold during the period”(Libby, R., Libby, P. A., & Short, D. G., 2004). Basically, it represents how many times in a period the average inventory was produced and sold to customers. “The average days to sell inventory represents the average time normally in days, it takes for a company to produce and deliver inventory to its customers” (Libby, R., Libby, P. A., & Short, D. G. (2004). b. If your company reports inventories, compute these ratios for each of the last three years. If the company does not report the cost of sales separately assume that COS equal 70% of the sales amount. The average turnover ratio = [Cost of sales (Sales X 70%)]/(((Beginning inventory + Ending inventory)/2) )

Average days to sell inventory = (Average Inventory)/(((Cost of Sales)/(365 days)) )

For 2010:

= (Sales X 70%) / [(Beginning inventory + End inventory) /2] = ( 0,70 X 30315) / [ (1982 + 1956) / 2]
= 21 220,5 / 1969
= 10.77

Average days to sell inventory for 2010
= [ Average inventory / (Cost of sales / 365 days)]
= [ 1969 / (21220,5 / 365)]
= 33.87

For 2011:

= (Sales X 70%) / [(Beginning inventory + End Inventory) / 2] = (0,70 X 30703) / [(1956 + 2025) / 2]
= 21 492, 1 / 1990,5
= 10,80

Average days to sell inventory for 2011
= [Average inventory / (Cost of sales / 365 days)]
= [1990,5 / (21492,1 / 365)]
= 33,80

For 2012:
= (Sales X 70%) / [ (Beginning inventory + End inventory)/2] = (0,70 X 30960) / [(2025 + 2007) / 2]
= 21 672 / 2016
= 10,75

Average days to sell inventory for 2012
= [Average inventory / (Cost of sales / 365 days)]
= [2016 / (21 672 / 365)
= 33,95

c. What do your results suggest about the company?

Both the inventory turnover ratio and the average days to sell inventory have approximately always the same number from 2010 to 2011. The variation is in decimal so we can consider that there’s not a significant variation in both these ratios. This might be a good thing considering that every year those ratios are constant this means that the number of times the average inventory was produced and...
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