Lower-of-Costor-Market. " Ceiling and floor. " How LCM works. " Application of LCM. " Market. " Use of an allowance. " Multiple periods

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1 Chapter 9 Inventories: Additional Valuation Issues Inventory Chapters Topic of chapters 8 and 9 Inventory: Asset on balance sheet of goods sold: Expense on I/S See Target, co, Intel, Radio Shack, Tiffany 1 2 Learning Objectives Inventories: Additional Valuation Issues Describe the lower-of-cost-or-market rule Explain when to value inv at net realizable value Explain when to use relative sales value Discuss purchase commitments Calc ending inventory using gross profit method Calc ending inventory using retail inventory method Explain how to report and analyze inventory 3 Lower-of-or-Market " Ceiling and floor " How LCM works " Application of LCM " Market " Use of an allowance " Multiple periods " Evaluation of rule Valuation Bases " Net realizable value " Relative sales value " Purchase commitments Gross Profit Method " Gross profit percentage " Evaluation of method Retail Inventory Method " Concepts " Conventional method " Special items " Evaluation of method Presentation and Analysis " Presentation " Analysis Learning Objectives Price vs. Describe lower-of-cost-or-market rule Explain when to value inventory at net realizable value In everyday language we use terms price and cost interchangeably Specific meaning in accounting Price of inventory Selling price to customer 5 of inventory Purchase cost from vendor to manufacture unit sold 6 1

2 Inventory Inventory is an asset Asset: Future economic benefit (cash flow) Problem: What if cost is greater than selling price? Future cash inflow less then cash outflow Selling price: $30 Purchase cost: $40 Why Inventory Values Decline Normal market fluctuations Obsolesce Excessive inventory Damaged goods Deflation If cost declines then decline in selling price likely 7 8 Decline in Value of Inventory When future utility (revenue-producing ability) falls below original cost Depart from historical cost principle Record loss when decline in value occurs, not in period of sale Conservatism: Record losses at earliest possible time, value assets at lowest amt Lower-of--or-Market (LCM) GAAP: Value inventory at (FIFO, LIFO, weighted-average) Or current market value Whichever is lower 9 10 Determining Market Value Market value middle of three values Replacement cost Ceiling: (NRV) Floor: NRV less Normal Profit Highest possible market value Selling price Completion and disposal costs Net realizable value

3 For block of granite For a barrel of oil Selling price $30 Selling price $100 Completion and disposal costs $0 Completion and disposal costs $20 Net realizable value $30 Net realizable value $80 Selling price ($30) = of goods sold ($30) 13 Selling price ($100) = of goods sold ($80 + $20) 14 NRV Gross Profit Highest possible market value Net income ê at write down Only impacts net income at write down Net income unchanged at sale Selling price = of goods sold Gross profit = $0 Many companies use NRV as market Lowest possible market value Selling price Completion and disposal costs Net realizable value Gross profit (Price Gross profit %) Net realizable value Normal profit $100 $20 $80 $30 $50 IFRS always uses NRV as market value NRV Gross Profit Determining Market Value Lowest possible market value Net income ê at write down Net income é at sale Recognize gross profit at time of sale Which value should we use? (Ceiling) less Normal Profit (Floor)

4 Determining Market Value Determining Market Value Calculate three values (NRV): Ceiling NRV less Normal Profit: Floor Replacement cost Pick middle value Which value should we use? Middle value (Ceiling) Replacement Any of values could be middle value 19 less Normal Profit (Floor) 20 Determining Market Value Determining Market Value Replacement (Ceiling) Which value should we use? Middle value (Ceiling) Which value should we use? Middle value less Normal Profit (Floor) less Normal Profit (Floor) 21 Replacement 22 Lower-of--or-Market Lower of or Market FIFO LIFO Average Market Pick middle value Ceiling = NRV Replacement cost Floor = NRV Profit Inventory FIFO cost = $20 per unit Determine market value Selling price = $30 to complete and dispose = $4 Replacement cost = $21.50 Normal profit margin of = $5 GAAP LCM 24 4

5 Lower of or Market Lower of or Market Ceiling Calculation Selling price Less cost to complete = Ceiling (NRV) $30.00 $4.00 $26.00 Compare market value to cost Choose lower amount Replacement $21.50 Market Value (Replacement ) $21.50 Floor Calculation Ceiling (NRV) Less gross profit = Floor (FIFO Basis) $20.00 $26.00 $5.00 $ Lower of or Market Three Methods to Apply LCM Inventory LIFO cost of $95.00 per unit Determine market value (middle value) Replacement cost = $80.00 NRV = $ Apply LCM to Individual items Class of inventory Entire inventory as group NRV reduced by normal profit = $85.00 NRV (Ceiling) NRV less GP (Floor) Replacement Middle $100 $85 $80 Lower (LIFO Basis) Market Value $95 $ Individual Item LCM Prevails Must use for tax purposes Most conservative Lowest value of inventory Three Methods to Apply LCM Lower of or Market Item Market By Item By Line By Inv Shoes: 1 $50,000 $65,000 $50,000 Shoes: 2 $100,000 $90,000 $90,000 Shoes Line $150,000 $155,000 $150,000 Hats: 1 $80,000 $65,000 $65,000 Hats: 2 $90,000 $56,000 $56,000 Hats: 3 $95,000 $86,000 $86,000 Hats Line $265,000 $207,000 $207,000 Total $415,000 $362,000 $347,000 $357,000 $362,

6 AJE: Adjusting to Market Debit Loss on LCM write-down OR of goods sold Credit Inventory OR Allowance for LCM write-down AJE: Adjusting to Market Write-off reduces net income Market value becomes new book value No write-up if values increase Date Description Debit Credit of goods sold 1,000 Inventory 1, Date Description Debit Credit Loss on LCM write-down 1,000 Inventory 1, AJE: Allowance method Write-off reduces net income Market value becomes new book value No write-up if values increase Description Debit Credit of goods sold 1,000 Allowance to reduce inventory to market 1,000 Description Debit Credit Loss due to decline of inventory to market 1,000 Allowance to reduce inventory to market 1, Account Activity Inventory Purchased Sold (cost) Sal returns Pur returns Freight-in Allow to reduce to mkt AJE AJE Asset All amounts at cost, not selling price Contra asset Inventory Calculation Inventory at cost Allowance to reduce inventory to market Inventory at lower-of-cost-or-market Allowance Multiple Periods Date Market Difference 12/31/ /31/ /31/ Asset Contra-asset 36 6

7 2011: Year 1 Allowance before AJE, $0 Desired ending balance, $ : Year 1 AJE Description Debit Credit Loss due to decline of inventory to market 10 Allowance to reduce inventory to market Inventory Allow to reduce to mkt 0??? Inventory Allow to reduce to mkt 0 AJE Date Market Difference 12/31/ Date Market Difference 12/31/ : Year 1 Balance Sheet Balance sheet Inventory at cost 100 Less allowance 10 Inventory at lower-of-cost-or-market 90 Allowance Multiple Periods Date Market Difference 12/31/ /31/ /31/ Date Market Difference 12/31/ : Year 2 Allowance before AJE, $10 Desired ending balance, $6 2012: Year 2 AJE Description Debit Credit Allowance to reduce inventory to market 4 Loss due to decline of inventory to market Inventory Allow to reduce to mkt 10 AJE Inventory Allow to reduce to mkt 10 AJE 4 6 Date Market Difference 12/31/ Date Market Difference 12/31/

8 2012: Year 2 Balance Sheet Balance sheet Inventory at cost 180 Less allowance to reduce inventory to market 6 Inventory at lower-of-cost-or-market 174 Allowance Multiple Periods Date Market Difference 12/31/ /31/ /31/ Date Market Difference 12/31/ : Year 3 Allowance before AJE, $6 Desired ending balance, $ : Year 3 AJE Description Debit Credit Loss due to decline of inventory to market 14 Allowance to reduce inventory to market Inventory Allow to reduce to mkt 6 AJE Inventory Allow to reduce to mkt 6 AJE Date Market Difference 12/31/ Date Market Difference 12/31/ : Year 3 Balance Sheet Balance sheet Inventory at cost 200 Less allowance to reduce inventory to market 20 Inventory at lower-of-cost-or-market 180 Date Market Difference 12/31/ Using NRV when NRV > Can value inventory at selling price? Exception to LCM: Value inventory at NRV (selling price) if NRV > when Regulated market with quoted price applicable to all quantities No significant costs of disposal Examples Mining company values gold Farming company values soybeans 48 8

9 Learning Objectives Explain when to use relative sales value Also called lump-sum method or basket method Relative Sales Value Purchase land, cost $150,000 Divide into four parcels Allocate cost on relative sales value Estimated sales value, $200, Parcel Estimated Selling Price Relative Price Percent Total Allocated North $60,000 $60 / $200 = 30% $150,000 = $45,000 South $40,000 $40 / $200 = 20% $150,000 = $30,000 East $30,000 $30 / $200 = 15% $150,000 = $22,500 West $70,000 $70 / $200 = 35% $150,000 = $52,500 Total $200, % $150,000 Learning Objectives Discuss purchase commitments Ordinary Orders Not recorded by buyer or seller if Price determined at time of shipment Order may be cancelled by buyer or seller Not considered purchase commitment Purchase Commitments Formal non-cancelable contract Purchase a specified amount of inventory At specified prices On or before specified dates No journal entry when signed Disclose in notes if material Purchase Commitments No gain ever recorded If loss expected AJE required Record both losses and recoveries If contract price > market price, and buyer expects loss will occur, buyer records liability and loss in period when decline in market price takes place

10 Purchase Commitment #1 May 1, 2011 Sign commitment, requires purchase of inventory for $100,000 by 12/01/2011 December 1, 2011 Purchased inv, market value $90,000 No JE JE Date Description Debit Credit 12/1 Inventory 90,000 Loss on purchase commitment 10,000 Cash 100, Purchase Commitment #2 July 1, 2011 Signed commitment, requires purchase of inventory for $200,000 by March 1, 2012 December 31, 2011 Market value of inventory, $188,000 March 1, 2012 Purchased inv, market value $186,000 No JE AJE JE 56 Purchase Commitment #2 July 1, 2011 Signed commitment, requires purchase of inventory for $200,000 by March 1, 2012 December 31, 2011 Market value of inventory, $188,000 No JE AJE Date Description Debit Credit 12/31 Estimated loss purchase commit 12,000 Estimated liability purch comm 12, July 1, 2011 Signed commitment, requires purchase of inventory for $200,000 by March 1, 2012 December 31, 2011 Market value of inventory, $188,000 March 1, 2012 Purchased inv, market value $186,000 No JE AJE JE Date Description Debit Credit 3/1 Inventory 186,000 Loss on purchase commitments 2,000 Estimated liability on pur com 12,000 Cash 200, Purchase Commitment #3 October 1, 2011 Signed commitment, requires purchase of inventory for $500,000 by February 1, 2012 December 31, 2011 Market value of inventory, $400,000 February 1, 2012 Purchased inv, market value $530,000 No JE AJE JE 59 Purchase Commitment #3 October 1, 2011 Signed commitment, requires purchase of inventory for $500,000 by February 1, 2012 December 31, 2011 Market value of inventory, $400,000 No JE AJE Date Description Debit Credit 12/31 Estimated loss purchase commit 100,000 Estimated liability purch comm 100,

11 October 1, 2011 Signed commitment, requires purchase of inventory for $500,000 by February 1, 2012 December 31, 2011 Market value of inventory, $400,000 February 1, 2012 Purchased inv, market value $530,000 No JE AJE JE Learning Objectives Calculate ending inventory using gross profit method Date Description Debit Credit 2/1 Inventory 500,000 Cash 500,000 Estimated liability purch comm 100,000 Est. loss purchase commit 100, Count Inventory Inventory on balance sheet Large dollar amount Large percentage of total assets CGS on income statement Large dollar amount Large percentage of net sales Must count inventory at year-end Inventory Estimation Physical inventory ly Time consuming Two methods to estimate inventory Gross profit method Retail inventory method Inventory Estimation Both methods used to Estimate inventory for interim reports Estimate inventory lost, destroyed, stolen Prepare budgets and forecasts Test of overall reasonableness (auditors) Gross Profit Method Not used in annual financial statements May be used for quarterly, interim reprts Problems with gross profit ratio Changes over time, may not be stable Mix of goods sold changes over time Method uses past ratio, not current

12 Given Ending Inv Calc CGS Calculation of of Goods Sold Beginning inventory $ 20,000 Net purchases 100,000 of goods available for sale 120,000 Less ending inventory 30,000 of goods sold $ 90,000 Given CGS Calc Ending Inv Calculation of Ending Inventory Beginning inventory $ 20,000 Net purchases 100,000 of goods available for sale 120,000 of goods sold 90,000 Ending inventory $ 30, Last Year Sales % CGS % Gross profit 90 30% Current Year Sales 200 Beg Inventory 5 Purchases 150 Last Year Sales % CGS % Gross profit 90 30% Current Year Sales 200 Beg Inventory 5 Purchases 150 Solve for Ending Inventory Solve for Ending Inventory Sales $ 200,000 Beginning inventory $ 5,000 Purchases 150,000 Goods available 155,000 Ending inventory?,??? of goods sold?,??? Gross profit?,??? 69 Sales $ 200,000 Beginning inventory $ 5,000 Purchases 150,000 Goods available 155,000 Ending inventory?,??? of goods sold (200,000 70%) 140,000 Gross profit (200,000 30%) $ 60, Last Year Sales % CGS % Gross profit 90 30% Current Year Sales 200 Beg Inventory 5 Purchases 150 Convert Gross Profit % Selling Price Gross Profit Solve for Ending Inventory Sales $ 200,000 Beginning inventory $ 5,000 Purchases 150,000 Goods available 155,000 Ending inventory 15,000 of goods sold (200,000 70%) 140,000 Gross profit (200,000 30%) $ 60, Gross Profit as a Percentage of Sales 20 / 100 = 20% Gross Profit as a Percentage of 20 / 80 = 25% Harder: Textbook uses conversion formula Easier: Make up numbers 72 12

13 Convert Gross Profit % Given gross profit as % of cost, 25% Convert to gross profit as % of sales Learning Objectives Calculate ending inventory using retail inventory method Assume a gross profit of $1, 25% = 1 = 4 Selling Price Gross Profit Gross Profit as a Percentage of Sales 1 / 5 = 20% Retail Inventory Method Developed for department stores High-volume, many items, low prices More accurate than gross profit method Uses current cost-to-retail % of goods currently available for sale Accepted by GAAP IRS (tax purposes) 75 Step 1: Retail Inventory Method Keep track of each inventory item at both cost and selling price (retail) Item Retail Chair $180 $ Table Sofa Step 2: Retail Inventory Method Step 3: Retail Inventory Method Determine goods available at ( of goods available, always done) Retail Calculate cost-to-retail % Goods available for sale at retail Sales at retail Ending inventory at retail Goods available at purchase cost Goods available at retail price -to-retail %

14 Step 4: Retail Inventory Method Retail Inventory Method Retail ending inv Retail = ending inv Retail Beginning inventory $27,000 $45,000 Net purchases $180,000 $300,000 Goods available $207,000 $345,000 Sales $310,000 / Retail = 207 / 345 = 60% Retail Inventory Method Retail Inventory, May 1 $ 27,000 $ 45,000 Net purchases for May 180, ,000 Goods available for sale 207, ,000 ratio: (207, ,000) = 60% Sales for May (310,000) Ending inventory at retail $ 35,000 Ending inventory at cost? Retail Inventory Method Retail Inventory, May 1 $ 27,000 $ 45,000 Net purchases for May 180, ,000 Goods available for sale 207, ,000 ratio: (207, ,000) = 60% Sales for May x (310,000) Ending inventory at retail $ 35,000 Ending inventory at cost $ 21,000? Retail Inventory Method Incorporate cost flow assumptions to approximate Average cost Lower-of-average-cost-or-market (conventional) LIFO FIFO (less frequently used) Term Initial markup Additional markup Markup cancellation Markdown Terminology Definition Original amount of markup from purchase cost to selling price Increase in selling price subsequent to initial markup Elimination of an additional markup Reduction in selling price below the original selling price Markdown cancellation Elimination of a markdown Markup and markdown apply to selling price only, not cost

15 Retail Inventory: Average Include markups and markdowns in the computation of the -to-retail % -to-retail % Beginning inventory + Net purchases Begin inventory + Net purchases + Net Markups Net Markdowns Retail Inventory: Average Retail Beginning inventory $21,000 $35,000 Net purchases $200,000 $304,000 Goods available $207,000 $345,000 Sales $300,000 Net markups $8,000 Net markdowns $4, Retail Inventory: Average Retail Inventory, June 1 $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods available for sale 221, ,000 ratio: (221, ,000) = 64.43% Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? Retail Inventory: Average Retail Inventory, June 1 $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods available for sale 221, ,000 ratio: (221, ,000) = 64.43% Less: Sales for June x (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost $ 27,705? Avg LCM: Conventional GAAP: Value inventory at LCM Method to approximate average LCM When calculating cost-to-retail ratio Include net markups Do NOT include net markdowns Avg LCM: Conventional Retail Beginning inventory $21,000 $35,000 Net purchases $200,000 $304,000 Sales $300,000 Net markups $8,000 Net markdowns $4,000 -to-retail % Beginning inventory + Net purchases Begin inventory + Net purchases + Net Markups Net Markdowns 89 Exclude net markdowns from cost-to-retail percentage (Larger denominator decreases cost percentage) Include net markdowns in goods available at retail 90 15

16 Avg LCM: Conventional Retail Inventory, June 1 $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8, ,000 Less: Net Markdowns (4,000) Goods Available for Sale 221, ,000 ratio: (221, ,000) = 63.69% Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? Avg LCM: Conventional Retail Inventory, June 1 $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8, ,000 Less: Net Markdowns (4,000) Goods Available for Sale 221, ,000 ratio: (221, ,000) = 63.69% Less: Sales for June x (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost $ 27,387? LIFO Inventory Reason to use LIFO Tax advantages Better matching of costs and revenues Two LIFO methods Stable prices: LIFO Retail Fluctuating prices: Dollar-Value LIFO Retail LIFO Methods One layer per year Each layer has cost-to-retail percentage Markups and markdowns in current period are used to calculate cost-toretail percentage for current layer The LIFO Retail Method Assume retail prices of goods stable Establish a LIFO base layer (beginning inventory) and add (or subtract) layer from current period Calculate cost-to-retail % each layer The LIFO Retail Method Each layer has cost-to-retail % Beginning inventory at cost -to-retail % Begin inventory at retail -to-retail % Net purchases at cost Net purchases at retail + Net Markups Net Markdowns

17 The LIFO Retail Method The LIFO Retail Method Retail Beginning inventory $21,000 $35,000 Net purchases $200,000 $304,000 Net markups $8,000 Net markdowns $4,000 Sales $300,000 Calculate cost-to-retail percentage for each layer 97 Retail Inventory, June 1 (60%) $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods Available (Less Beg. Inv.) 200, ,000 Goods Available (Incl. Beg. Inv.) 221, ,000 LIFO ratio: Requires a composite ratio Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? 98 The LIFO Retail Method The LIFO Retail Method Retail Inventory, June 1 (60%) $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Beginning Net Markups inventory layer 21,000 / 35,000 = 60% 8,000 Less: Net Markdowns (4,000) Goods Available (Less Beg. Inv.) 200, ,000 Goods Available (Incl. Beg. Inv.) 221, ,000 LIFO ratio: Requires a composite ratio Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? 99 Retail Inventory, June 1 (60%) $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods Available (Less Beg. Inv.) 200, ,000 Goods Available (Incl. Beg. Inv.) 221, ,000 LIFO Purchases ratio: layer 200,000 / 308,000 = 64.94% Requires a composite ratio Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? 100 The LIFO Retail Method Retail Inventory, June 1 (60%) $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods Available (Less Beg. Added Inv.) layer at 200,000 retail 308,000 Goods Available (Incl. Beg. 43,000 Inv.) 35, ,000 = 8, ,000 LIFO ratio: Requires a composite ratio Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? 101 The LIFO Retail Method Retail Current Inventory, Period June LIFO 1 (60%) ratio: $ 21,000 $ 35,000 Plus: (200,000 Net Purchases 308,000) = 64.94% 200, ,000 Net Markups Retail 8,000 Beginning Less: Net Inventory Markdowns $ 35,000 x 60%* = (4,000) 21,000 Current Goods Period's Available Layer (Less Beg. Inv.) 8,000 x 200, % = 308,000 5,195 ** Goods Total Available (Incl. Beg. $ Inv.) 43, , ,000 26,195 * $21,000 LIFO $35,000 ratio: = 60% ** rounded Requires (200,000 a composite 308,000) ratio = 64.94% Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost $? 26,

18 Dollar-Value LIFO Retail Eliminate effect of price changes before we compare the ending inventory with the beginning inventory Price index based upon retail prices Dollar-Value LIFO Retail Retail Beginning inventory $21,000 $35,000 Net purchases $200,000 $304,000 Sales $300,000 Net markups $8,000 Net markdowns $4, Price index Beginning of period 100 End of period Dollar-Value LIFO Retail Retail Inventory, June 1 (60%) $ 21,000 $ 35,000 Plus: Net Purchases 200, ,000 Net Markups 8,000 Less: Net Markdowns (4,000) Goods Available (Less Beg. Inv.) 200, ,000 Goods Available (Incl. Beg. Inv.) 221, ,000 LIFO ratio: Requires a composite ratio Less: Sales for June (300,000) Ending inventory at retail $ 43,000 Ending inventory at cost? Start with ending inventory at retail 105 Ending Inventory Step 1 at Year-end Retail Prices Ending Inventory at Base $ 43,000 Year Retail Prices (Determined earlier) $ 43, = $ 42,157 Step 2 Step 3 Inventory Layers Inventory Layers at Base Year Retail Prices Converted to LIFO $ 42,157 35,000 x 1.00 x 60.00% = $ 21, ,157 x 1.02 x 64.94% = 4, Total Ending Inventory at Dollar Value LIFO Retail $ 25, Include in -to-retail % Not Included: -to-retail % Term Retail Freight-in Add No entry Purchase returns Deduct Deduct Purchase discounts taken (gross method only) Abnormal shortages (breakage, theft) Deduct Deduct No entry Deduct Transfers-in Add Add Term Retail Normal shortages (breakage, theft) No entry Deduct Employee discounts No entry Deduct Sales returns No entry Reduces net sales Sales discounts (gross method only) No entry No entry

19 Changes in Inventory Method Voluntary changes in accounting principles are reported retrospectively Restate all previous financial statements as though new method had been used in all prior periods Disclosure note describes the change and justification for the change 109 See Tiffany Annual Report 110 Changes in Inventory Method Changes in inventory methods, other than a change to LIFO, are treated retrospectively Change To The LIFO Method When changing to LIFO not possible to recreate inventory layers Not possible to calculate income effect on prior years Do not report the change retrospectively Apply from point of adoption forward Change To The LIFO Method Disclosure note is needed to explain Nature of change Effect of change on current year s income Why retrospective application impracticable IFRS vs. GAAP IFRS does not allow LIFO LCM: IFRS defines market as NRV Inventory written down under LCM: GAAP: May not be written back up IFRS: Write-down may be reversed

20 Learning Objectives Analysis of inventory Inventory Turnover How many times do we buy and sell average inventory during year Inventory turnover = of goods sold Average inventory Inventory Turnover How many times do we buy and sell average inventory during year Days To Sell Inventory How many days to sell $1 of inventory Inventory turnover = of goods sold Beg inv + End inv ( 2 ) Days to sell inventory = 365 Inventory turnover Gross Profit Ratio End of Chapter How much of every $1 of sales becomes gross profit? Gross profit ratio = Gross profit Net sales