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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 6-3 Estimating the Inventory
CENTURY 21 ACCOUNTING © Thomson/South-Western MERCHANDISE INVENTORY TURNOVER The more rapidly a business sells merchandise, the more chance it has to make a satisfactory net income Two measures of the speed with which merchandise inventory is sold are: Merchandise inventory turnover ration Average number of days sales in merchandise inventory 2 LESSON 6-3
CENTURY 21 ACCOUNTING © Thomson/South-Western MERCHANDISE INVENTORY TURNOVER The number of times the average amount of merchandise inventory is sold during a specific period of time is called the merchandise inventory turnover ratio A merchandise inventory turnover ratio expresses a relationship between an average inventory & the cost of merchandise sold A low merchandise inventory turnover ratio usually indicates a low return on investment 3 LESSON 6-3
CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 6-3 Average Merchandise Inventory =2÷ December 31 Merchandise Inventory + January 1 Merchandise Inventory $925, $170,845.00=5.4 times Cost of Merchandise Sold + Average Merchandise Inventory = Merchandise Inventory Turnover Ratio MERCHANDISE INVENTORY TURNOVER ($168, $173,325.00)÷2=$170, page 184 A 5.4 merchandise inventory turnover ratio means that the business sold the average merchandise inventory 5.4 times during the current year
CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 6-3 AVERAGE NUMBER OF DAYS’ SALES IN MERCHANDISE INVENTORY Average Number of Days’ Sales in Merchandise Inventory = Merchandise Inventory Turnover Ratio ÷Days in Year 365÷5.4=68 days page 184 The period of time needed to sell an average amount of merchandise inventory is called the average number of days’ sales in merchandise inventory The average number of days’ sales in merchandise inventory based on a 5.4 merchandise inventory turnover ration is calculated above The average number of days’ sales in merchandise inventory is rounded to the nearest day. This provides managers with adequate information to make sound business decisions regarding inventory
CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 6-3 TERMS REVIEW merchandise inventory turnover ratio average number of days’ sales in merchandise inventory page 185
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