Question

Analysis of a company's financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.

Income Statement

Sales $100,000
COGS $41,700
Variable Sales and Admin $10,000
Fixed Sales and Admin $5,000
Net Income $43,300
Balance Sheet

Assets
Cash $10,000
Acconts Receivable $5,000
Inventory $10,000
Liabilities
Accounts Payable $5,000
Notes Payable $5,000
Shareholder's Equity
Common Stock $5,000
Retained Earnings $10,000
A 15% increase in inventory turns for Toys by Tom, Inc. would bring this ratio to _____, suggesting _____ in _____.

109 days; a deterioration; profitability

3.9 days; a deterioration; profitability

4.8 times; an improvement; efficiency

3.9 times; an improvement; efficiency

Answer 1

Answer:

The answer is:

A 15% increase in inventory turns for Toys by Tom, Inc. would bring this ratio to 4.8 times, suggesting improvement in efficiency.

Explanation:

We have the current Inventory turnover = COGS / Inventory = 41,700/10,000 = 4.17 times

=> An 15% increase in the Inventory turnover will bring the Inventory turnover ratio to: 4.17 x 1.15 = 4.8 times;

Increasing in inventory turnover may be the result of higher sales ( thus higher COGS) or low level of inventory holding - thus limiting the resources spending on idle inventory. So, higher level of inventory turnover in someways suggesting improvement in efficiency.