- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 2. Activity Ratios

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**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

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**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 |