Multiple Choice
Which of the following formulas is used to compute the average days in inventory?
14. Financial Statement Analysis
Ratios: Average Days in Inventory
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ABC Company had $200,000 in Net Sales and Gross Profit of $80,000. If Inventory had a balance of $60,000, what is the company's average days in inventory ratio?
A
274 days
B
182 days
C
110 days
D
Not enough information
Verified step by step guidance1
Understand the formula for the average days in inventory ratio, which is: \( \text{Average Days in Inventory} = \frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \times 365 \).
Calculate the Cost of Goods Sold (COGS) using the formula: \( \text{COGS} = \text{Net Sales} - \text{Gross Profit} \). Substitute the given values: \( \text{COGS} = 200,000 - 80,000 \).
Determine the Average Inventory. Since only the ending inventory is provided, assume it represents the average inventory for simplicity, which is $60,000.
Substitute the values into the average days in inventory formula: \( \text{Average Days in Inventory} = \frac{60,000}{\text{COGS}} \times 365 \).
Solve the equation to find the average days in inventory, ensuring all calculations are performed accurately to determine the correct number of days.
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