CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

You are given the following information for Treetop Company for 2015:

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

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 10

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
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