- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 2. Activity Ratios
CFA Practice Question
You are given the following information for Treetop Company for 2015:
Gross Profit: $12,000
Inventory, 1/1: $5,000
Year 2015 Purchases: $23,000
Accounts Receivable 12/31: $6,500
B. 2.4 times
C. 1.8 times
Net Sales: $30,000
Gross Profit: $12,000
Inventory, 1/1: $5,000
Year 2015 Purchases: $23,000
Accounts Receivable 12/31: $6,500
What was Treetop's inventory turnover for 2015?
A. 4.0 times
B. 2.4 times
C. 1.8 times
Correct Answer: B
CGS = 18,000 (since Net Sales - CGS = Gross Profit)
Avg. Inventory= 7,500 [beginning inventory + ending inventory]/2
where:
BI = 5,000 (given)
EI = 10,000 (BI of 5,000 +23,000 purchased - 18,000 sold)
$18,000/7,500 = 2.4 times
Inventory turnover= Cost of Goods Sold/Average Inventory
CGS = 18,000 (since Net Sales - CGS = Gross Profit)
Avg. Inventory= 7,500 [beginning inventory + ending inventory]/2
where:
BI = 5,000 (given)
EI = 10,000 (BI of 5,000 +23,000 purchased - 18,000 sold)
$18,000/7,500 = 2.4 times
User Contributed Comments 11
| User | Comment |
|---|---|
| synner | how do you know that there are 18,000 units sold? we know CGS is 18,000, but that doesn't mean there are 18,000 units sold. right? |
| johnfuller | synner: we are not talking about units of sold right? Why do you care this? |
| rajsangar | could someone elaborate on the '18000 sold' please? |
| robbjm30 | 18000 sold is COGS. Sales minus Gross Profit = COGS. You can use the COGS = Beg Inv + Purchases - Ending Inv equation to solve for ending inventory to get your average inventory in the equation. |
| nagri | Cost of goods is always for the sales of that period -- Matching Principle. If you are working on the units instead of value, the equation OB+Purchases-CI gives you the quantity sold and its cost is the cost of goods sold. |
| nsmwaura | Just a point to remind myself... use COGS for inventory and payables turnover...all the rest pretty much use sales |
| teddajr | Inv Purchased = End Inv-Beg Inv + Cogs =>23000 = 5000-Beg Inv + 8000 => Beg Inv = 10000 So, Avg Inv = Beg Inv + End Inv / 2 = 10,000 + 5,000 / 2 = 7500 |
| StanleyMo | Classical questions. |
| rocyang | good one |
| jonan203 | there are two journal entries for every unit of inventory sold: DR: Cash or AR - $X CR: Revenue - $X DR: COGS - $18,000 CR: Mechandise Inventory - $18,000 COGS is how you account for the reduction in merchandise inventory $5000 BI + $23,000 Purchased - $18,000 Sold = $10,000 EI ($5000 BI + $10000 EI)/2 = $7,500 AI $18,000 COGS / $7,500 AVG Inv = 2.4 Turnover |
| ko960531 | Inv Purchase = End Inv - Beg Inv + COGS Avg Inv = (Beg Inv + End Inv)/2 COGS = Net Sale - Gross Profit |