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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 6-3 Estimating the Inventory.

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Presentation on theme: "CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 6-3 Estimating the Inventory."— Presentation transcript:

1 CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 6-3 Estimating the Inventory

2 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

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

4 CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 6-3 Average Merchandise Inventory =2÷ December 31 Merchandise Inventory + January 1 Merchandise Inventory $925,368.00+$170,845.00=5.4 times Cost of Merchandise Sold + Average Merchandise Inventory = Merchandise Inventory Turnover Ratio MERCHANDISE INVENTORY TURNOVER ($168,365.00+$173,325.00)÷2=$170,845.00 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

5 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

6 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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