'j S prod.reader-ui.prod.mheducation.com [ D:.::! Topic: Chapter 6 Ratio Analysis - Inventory Turnover m Exercises { 1370f1155 > Aa Page 246 Exercise 6-19 Inventory turnover and days' sales in inventory 5 A3 Use the following information for Palmer Co. to compute inventory turnover for Year 3 and Year 2, and its days' sales in inventory at December 31, Year 3 and Year 2. From Year 2 to Year 3, did Palmer improve its (@) inventory turnover and (b) days' sales in inventory? Year 3 Year 2 Year 1 Cost of goods sold $643,825 $426,650 $391,300 Ending inventory 97,400 87,750 92,500 + M v QO B prod.reader-ui.prod.mheducation.com l + O ':::1 Topic: Chapter 6 Ratio Analysis - |... m Exercises m Decision Analysis u Homework Help - Q&A from Onlin... Inventory Turnover Inventory turnover, also called merchandise inventory turnover, is defined in Exhibit 6.13. Inventory turnover tells how many fimes a company turns over (sells) its inventory in a period. It is used to assess whether management is doing a good job controlling the amount of inventory. A low ratio means the company may have more inventory than it needs or is struggling to sell inventory. A very high ratio means inventory might be too low. This can cause lost sales if customers must back-order merchandise. Inventory turnover has no simple rule except to say a high ratio is preferable if inventory is adequate to meet demand. EXHIBIT 6.13 Inventory Turnover Cost of goods sold Inventory turnover = Average inventory Days' Sales in Inventory Days' sales in inventory is a ratio that shows how much inventory is available in terms of the number of days' sales. It can be interpreted as the number of days one can sell from existing inventory if no new items are purchased. This