# Question

The recent financial statements of McLelland Clothing Inc. include the following data:

Sales ............... $754,690

Cost of goods sold:

Computed under FIFO ........ 528,600

Computed under LIFO ........ 555,000

Average inventory:

Computed under FIFO ........ 72,200

Computed under LIFO ........ 45,800

Required:

1. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the FIFO inventory costing method. Be sure to explain what each ratio means.

2. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the LIFO inventory costing method.

Be sure to explain what each ratio means.

3. Which ratios—the ones computed using FIFO or LIFO inventory values—provide the better indicator of how successful McLelland was at managing and controlling its inventory?

Sales ............... $754,690

Cost of goods sold:

Computed under FIFO ........ 528,600

Computed under LIFO ........ 555,000

Average inventory:

Computed under FIFO ........ 72,200

Computed under LIFO ........ 45,800

Required:

1. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the FIFO inventory costing method. Be sure to explain what each ratio means.

2. Calculate McLelland’s gross profit ratio (rounded to two decimal places), inventory turnover ratio (rounded to three decimal places), and the average days to sell inventory (assume a 365-day year and round to two decimal places) using the LIFO inventory costing method.

Be sure to explain what each ratio means.

3. Which ratios—the ones computed using FIFO or LIFO inventory values—provide the better indicator of how successful McLelland was at managing and controlling its inventory?

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