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Ratios: Average Days in Inventory quiz #1

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  • How do you calculate the average days in inventory, and what does this ratio indicate about a company's inventory management efficiency?
    Average days in inventory is calculated by dividing 365 by the inventory turnover ratio, where the inventory turnover ratio is cost of goods sold divided by average inventory (average inventory = (beginning inventory + ending inventory) / 2). This ratio indicates the average number of days a unit remains in inventory before being sold; a lower number means higher efficiency in inventory management.
  • A company has a cost of goods sold of $240,000, a beginning inventory of $50,000, and an ending inventory of $70,000. What is its average days in inventory?
    First, calculate average inventory: ($50,000 + $70,000) / 2 = $60,000. Next, calculate inventory turnover: $240,000 / $60,000 = 4. Then, average days in inventory: 365 / 4 = 91.25 days. So, the company's average days in inventory is approximately 91 days.
  • What is the formula for calculating average inventory?
    Average inventory is calculated as (beginning inventory + ending inventory) divided by 2.
  • How do you calculate the inventory turnover ratio?
    The inventory turnover ratio is calculated by dividing cost of goods sold (COGS) by average inventory.
  • What is the formula for average days in inventory?
    Average days in inventory is calculated as 365 divided by the inventory turnover ratio.
  • What does the average days in inventory ratio tell you about a company?
    It tells you the average number of days a unit remains in inventory before being sold, indicating inventory management efficiency.
  • Why is a lower average days in inventory considered more efficient?
    A lower average days in inventory means inventory is sold more quickly, reducing storage costs and increasing efficiency.
  • How can companies use benchmarking with average days in inventory?
    Companies compare their average days in inventory to industry averages or competitors to evaluate their efficiency.
  • If a company has a beginning inventory of $60,000, ending inventory of $100,000, and COGS of $320,000, what is its average days in inventory?
    Average inventory is $80,000, inventory turnover is 4.0, and average days in inventory is 91 days.
  • Why is holding inventory for longer periods costly for a company?
    Longer inventory holding increases costs such as warehouse rent and utilities, reducing overall profitability.
  • What is the formula for calculating days' sales in raw materials inventory (average days in inventory)?
    The formula for days' sales in raw materials inventory (average days in inventory) is 365 divided by the inventory turnover ratio, where inventory turnover ratio is calculated as cost of goods sold divided by average inventory.
  • How is days in inventory calculated using the inventory turnover ratio?
    Days in inventory is calculated by dividing 365 by the inventory turnover ratio, where the inventory turnover ratio equals cost of goods sold divided by average inventory.