inventory turnover ratio notes - cord

Inventory Turnover Ratio

SLIDE TEACHER NOTES

1

Inventory Turnover Ratio: one of the many ratios that a business uses to analyze and improve its profitability. But sometimes, getting at the numbers to calculate those ratios is the real challenge.

2

Here we introduce Nathan Smith—working in a music store, and getting promoted to Buyer.The last line provides the incentive for this module. How can Nate accomplish this?

3

In Nate’s enthusiasm for the company goals, he wants to start making changes.The new sections are music genres not already found in Esperante’s offerings. (Note that we simply selected three types of music from a large list of music types. You can feel free to edit the slides and substitute your own preferences, if you wish, with no consequence to the teaching.)

Selling It!Selling It!A Look at the


Meet Nathan “Nate” Smith

Nate Smith works for Esperante Music Sellers (EMS). After four years he’s learned a lot about the “alternative music” scene, often visiting backstage at local concerts and clubs.Recognizing his expertise, EMS has promoted Nate to Buyer. In this role, he

Identifies new artists and labels.Develops relationships with regional suppliers. Maintains a “hot inventory” for EMS stores.

Nate’s Better Idea

One of Nate’s first actions was to convince the owner to use some of the floor space for three new sections:

Alternative RockHip-Hop/RapLatin

But after a few months, Nate noticed that some of the new sections aren’t selling as well as he’d hoped.


SLIDE TEACHER NOTES

4

Correct answer is A. See the next slide for an explanation.

5

Correct answer is A. Nate should inventory the CDs remaining to determine how many have been sold. Comparing “profits” (choice B) won’t enable a good judgment of the situation because the profit depends on the selling price (subject to variations in selling price, specials, discounts, etc) and your cost.It’s a little late for a customer survey (choice C). And new customers probably couldn’t give a very meaningful opinion comparing the new sections with the rest of the store.Comparing with other stores (choice D) might be helpful, but 1) hard data to get, and 2) still not offer any comparison with the rest of Esperante’s sales.When compared to the number originally stocked on the display case, Nate can calculate a “inventory turnover ratio” for the old sections and the new sections, as we’ll see. The ratio for the old sections will at least tell us what Esperante Music expects as a minimum. Hopefully, the new sections will perform as good as or better than the old sections’ ratio, that is, the turnover ratio for the whole store

Question 1CPS-Q1

Nate wonders if the new sections are selling better or worse than the rest of the store. How can he be sure? Which of the following would be the best course of action?A. Compare the present inventories with the initial stock

amounts for the new and old sections.B. Compare the profit from the new sections with that of the

old sections.C. Survey new customers entering the store.D. Call a competing music store and see how their sales are

going for these types of music.

What Should Nate Do?

To better understand the actual sales, the best thing Nate can do is to compare the inventories: what’s left versus what was stocked.Or even better, what has sold versus what was stocked.

A. Compare the present inventories with the initial stock amounts for the new and old sections.


SLIDE TEACHER NOTES

6

Notice how we start with the known information: the record of how many we stocked, and the observation of how many remain. From that we CALCULATE how many were sold, and then calculate a ratio of the number sold to the number stocked. Be sure students understand how we formed the ratio: the number SOLD to the number STOCKED.Get the students to discuss: What is a good value for the ratio? (Ans: A ratio close to 1.00.) We’ll see later in the lesson that it’s strangely possible for the ratio to actually be greater than 1.

7

The correct answer is B. See the next slide for an explanation.

8

The correct answer is B. The larger the ratio, the better the sales.Be sure students understand that the value 0.80 (think: 80 cents) is greater than the value 0.75 (think: 75 cents), which is greater than the value 0.72 (think: 72 cents). You can also perhaps help by reminding them how decimal fractions can be written as regular fractions: 0.8 is the same as 8/10. Or 0.80 is the same as 80/100. Also, 0.75 is the same as 75/100, and 0.72 is the same as 72/100. Students may more readily accept the fact that 80/100 is greater than 75/100 which is greater than 72/100.Note: the symbol “>” means “is greater than.” Conversely, the symbol “<” means “is less than.” If any students are confused, you can remind them of the common clue that the taller side of the symbol is adjacent to the larger

Question 2

Sales During a Quarter

Nate checked the numbers on a few bands…

Three DeucesStocked: 20 CDsRemaining: 4 CDSold: 20 – 4 = 16 CDsRatio: 16/20 = 0.80

Raunchy RocketsStocked: 18 CDsRemaining: 5 CDSold: 18 – 5 = 13 CDsRatio: 13/18 = 0.72

Off Center BandStocked: 12 CDsRemaining: 3 CDSold: 12 – 3 = 9 CDsRatio: 9/12 = 0.75

CPS-Q2

Which of these three bands has the best (highest) sales ratio?A. Off Center BandB. Three DeucesC. Raunchy Rockets




Sales Ratio

The larger the ratio, the better the sales!

0.80 > 0.75 > 0.72




Which of these three bands has the best (highest) sales ratio?A. Off Center BandB. Three DeucesC. Raunchy Rockets

(0.75)

(0.80)

(0.72)


SLIDE TEACHER NOTESvalue. Reading from left to right then, “10 > 4” is read “ten is greater than four.” And “3 < 9” is read “three is less than nine.” To expound a little further, in Algebra classes students will typically see statements like “x < 5,” or “x is less than five.” While a full treatment is beyond the scope of this brief note, we can say that the variable “x” can have any value which would make a true statement. So we know that values of x like 0, 3, 4, –2, –10, and so forth would all be valid.

9

Correct answer is B: See next slide for an explanation.

10

Correct answer is B. Number sold = number stocked – number remaining = 24 – 8 = 16. So Ratio = Number sold/Number stocked = 16/24 = 0.66667, or 0.67 (rounded).

Question 3CPS-Q3

DownRight was initially stocked with 24 CDs. After three months, there are 8 CD’s remaining. What is the ratio of number sold to number stocked?A. 0.33B. 0.67C. 0.75D. 1.33

Sales Ratio

DownRight was initially stocked with 24 CDs. After three months, there are 8 CD’s remaining. What is the ratio of number sold to number stocked?A. 0.33B. 0.67C. 0.75D. 1.33

Stocked: 24– Remaining: 8

Sold: 16

16: 0.67 (rounded)

24Sold

RatioStocked


SLIDE TEACHER NOTES

11

Correct answer is C. See the next slide for an explanation.

12

Correct answer is C. Percentage = Ratio 100% = 0.666667 100% = 67% (rounded).Clarify to students that percentage is really just a ratio multiplied by 100%. Multiplying by 100% results in simply moving the decimal point to the LEFT two places (that’s what happens when we multiply by 100) and tacking on the percent sign (because we multiplied by both the number 100 AND the percent.”%” is like a unit of measure).

13

We’ve eased into this by using a ratio of the counts of the CDs—something concrete.Suggestion to help students relate: Bring in a stack of 24 CD cases (empty or not). State that this is the band’s starting inventory on the shelf. Now pull CDs off the stack (i.e., as they “sell”), one at a time, until only 8 remain. The ratio of number sold to the number you started with? 16/24 = 0.67Now, pull out a stack of play money: 24 $1-bills—1 bill for each CD. Remove16 bills, until only 8 remain. Count them. The ratio of dollars sold to the dollars you started with: 16/24 = 0.67. Suppose the bills were each $5 instead of $1; one bill for each CD as before. The ratio of dollars sold to the dollars you started with: 80/120 = 0.67.

Question 4CPS- Q4

So, DownRight’s sales ratio is 0.67. What percentage of DownRight’s disks have sold?A. 33%B. 57%C. 67%D. 75%E. 133%

Ratio to Percentage

So, DownRight’s sales ratio is 0.67. What percentage of DownRight’s disks have sold?A. 33%B. 57%C. 67%D. 75%E. 133%

100%

0.67 100%67%

Percentage Ratio

A Better Way

We’ve been calculating a ratio based simply on a count of the CDs.In reality, the store owner is more interested in costs and income:

The cost to stock the shelves.The cost of stock remaining.The income from sales of those CDs.


SLIDE TEACHER NOTESSuppose the bills were each $10 instead of $1 ; one bill for each CD as before. The ratio of dollars sold to the dollars you started with: 160/240 = 0.67.The next slide’s notes present one reason why the costs are preferred over the counts.

14

One advantage of using costs is that these numbers are typically available on the income statement (cost of good sold) and the balance sheet (cost of inventory), as we’ll see later.Note that we’re dealing with YOUR costs here (the business’s costs), not the customer’s costs (that is, the selling price). So, it’s important to use YOUR cost when determining the cost of good sold, and YOUR cost when determining the cost of the inventory.We will eventually be interested in comparing the ratios. Since the ratios are based on cost of goods sold, it is important to consider comparable time periods for the sales data. That is, we obviously expect the sales data to be different for a week, a month, a quarter, or a year. So we must be careful to compare quarterly data with quarterly data, annual data with annual data, and so forth.

15

Correct answer is D. See the next slide for an explanation.

Question 5

Ratio of Costs

Using costs (rather than counts):

Cost of Goods SoldInventory

Rat ot

iCos

where the costs can be calculated:

Cost Number of Items Cost per Item

whether it’s cost of items sold, or cost of items in inventory.This ratio is known as Inventory Turnover Ratio.

CPS-Q5

Recall Nate initially stocked 24 of DownRight’s CDs, and now there are 8 left. If the CDs cost Nate $4 each, what is DownRight’s Inventory Turnover Ratio?A. $4 per CDB. $3.33C. 75%D. 0.67

= $4


SLIDE TEACHER NOTES

16

Correct answer is D. The ratio is the same as before, because we’ve used the same cost for the CDs in the numerator and the denominator of our formula. Later, we’ll see how to handle costs that vary by item.

17

Back to Nate’s problem…We’ve kept the problem simple for now, in that all CD’s cost the same. So, as students have just seen, they can use either costs or counts to calculate the inventory turnover ratio.

18

The correct answer is D. See the next slide for an explanation.

Question 6


The “cost of good sold” is the number sold times the cost of each: 16 x $4 = $64.The “inventory cost” is the number stocked times the cost of each: 24 x $4 = $96.Thus,

D. 0.67

=

0.

$64 (rounded$96 6 )7

Cost of Goods SoldInventory Turnover RatioInventory Cost

Nate Takes Inventory

Nate’s consults his paperwork from stocking the shelves with $4 CDs, and also counts the number of unsold CDs in each section.

Latin :Stocked: 156 Unsold: 31

Alternative Rock:Stocked: 262 Unsold: 123

Hip-Hop/Rap:Stocked: 398 Unsold: 33

CPS-Q6

What are the inventory turnover ratios for the three sections, respectively?

A. 0.20, 0.47, 0.08 C. 0.20, 0.13, 0.23B. 0.31, 1.23, 0.33 D. 0.80, 0.53, 0.92

Latin: Stocked: 156, Unsold: 31 ($4 ea)Alternative Rock: Stocked: 262, Unsold: 123 ($4 ea)Hip-Hop/Rap: Stocked: 398, Unsold: 33 ($4 ea)


SLIDE TEACHER NOTES

19

The correct answer is D, calculated by dividing the number sold by the number stocked for each section. We need not bother with including costs here, since the since the cost for each CD stocked and each CD sold is the same, and will effectively “cancel.” Later we will use costs simply because the those figures are readily available from the business accounting statements.Note that we are given the number “unsold,” so we must first calculate the number sold.We show the calculation for the Latin CDs in the slide. The calculations for the remaining two genre’s are similarly done:

Alternative Rock: Sold = 262 – 123 = 139; Ratio = 139/262 = 0.53

(rounded)Hip-Hop/Rap:

Sold = 398 – 33 = 365; Ratio = 365/398 = 0.92

(rounded)Students choosing answer A probably failed to calculate the number sold, and simply calculated the ratio of unsold to stocked.

20

The correct answer is A. See the next slide for an explanation.

Question 7

Inventory Turnover Ratios

For each category, calculate the ratio of number sold to number stocked.For Latin: Stocked: 156, Unsold: 31 ($4 ea)

D. 0.80, 0.53, 0.92

156 31 125

Number Sold Number Stocked Unsold

125 (rounded)156

0.80

Number SoldInventory Turnover RatioNumber Stocked

CPS-Q7

Based on the inventory turnover ratios above, which new section is selling the fastest? Which is selling the slowest?A. Hip-Hop/Rap is fastest; Rock is slowest B. Latin is fastest; Hip-Hop/Rap is slowestC. Hip-Hop/Rap is fastest; Latin is slowestD. Rock is fastest; Hip-Hop/Rap is slowest

Latin: 0.80Alternative Rock: 0.53

Hip-Hop/Rap: 0.92


SLIDE TEACHER NOTES

21

The correct answer is A. The largest ratio (0.92 for the Hip-Hop/Rap section) indicates the greatest turnover; correspondingly, the smallest ratio (0.53 for the Alternative Rock section) indicates the least turnover.For a sales industry like this, a high turnover is generally a good thing.

22

Hmmm…Nate may be in trouble. The Alternative Rock section has a notably lower inventory turnover ratio. Since the use of the store’s floor space is important to the owner, Nate doesn’t want to be accused of using it inefficiently. Is a ratio around 0.5 unusual for Esperante? Perhaps the situation is really that the ratios for Latin and Hip-Hop/Rap are exceptionally good!One way to answer these questions is to compare to the ratios for other sales at Esperante.But Nate doesn’t have time to count the whole store’s inventory. There is a quicker way…

23

The Accounting Income Statement includes a report of the cost of goods sold (or cost of revenue) for the whole store for some period of time (like a month, or a quarter, or maybe even a year). Students need to see that this is equivalent to Nate’s calculations for his new sections that told him how much of his inventory had been sold. Help students find this value on the depicted income statement. We will use this value in a CPS question, so you can suggest that they write it down, or for extra challenge, see if they can find it again on the CPS question slide.On this depiction of the Income Statement, the Cost of Goods Sold is shown as a negative value because it will decrease the revenues as we work down the page to reach the net profit (or loss).

Inventory Turnover Ratios

The largest ratio (0.92) indicates the greatest turnover, or the fastest selling CDs.The smallest ratio (0.53) indicates the least turnover, or the slowest selling CDs.


Hip-Hop/Rap: 0.92

A. Hip-Hop/Rap is fastest; Rock is slowest

What’s a “Good” Turnover Ratio?

Nate is a little worried about the Alternative Rock section—at least compared to the other new sections.But, how do these ratios compare to the rest of the store’s CD sales?To answer that question, he consults Esperante’s quarterly income statement and balance sheet.

A Quarterly Inventory Turnover Ratio

From Esperante’s“financials” for the last quarter, Nate finds the “cost of goods sold” on the income statement.


SLIDE TEACHER NOTES

24

The Accounting Balance Sheet similarly includes a figure that gives the Inventory cost for the month. Students need to see that this is equivalent to Nate’s calculations for his new sections that told him how much it cost to stock the shelves with his three new types of music. Help students find this value on the depicted balance sheet. Since we will use this value in a CPS question, you can suggest that they write it down, or for extra challenge, you can see if they can find it again on the CPS question slide.On the next slide students will use these figures to actually calculate Esperante’s Inventory Turnover Ratio (actually an average for the quarter, since these figures are quarterly figures).

25

The correct answer is C. See the next slide for an explanation.

26

The correct answer is C. Based on the quarterly statements, the ratio equals the cost of goods sold ($232,710: found on the income statement) divided by the inventory cost ($198,718: found on the balance sheet), or $232,710/$198,718 = 1.17 (rounded).Students may be puzzled how the ratio could have value greater than 1. For the Latin CDs on the rack, the ratio can never be greater than 1. That is, if ALL of the CDs were sold, then the ratio would be 156/156 = 1.0. However, for the ratio for the store (using the financial statements), it is possible to have more sales during the quarter than final inventory reported on the quarterly statement. Hence, it is possible to have a ratio greater than 1. Of course, this suggests that the store had better quickly do something to restore the inventory to keep the

Question 8

A Quarterly Inventory Turnover Ratio

And from the balance sheet, he finds the inventory cost (or value) for the same quarter.

CPS-Q8

What is Esperante’sInventory Turnover Ratio based on the previous quarter’s statements?A. 0.42B. 0.85C. 1.17D. 2.54

Esperante’sInventory Turnover Ratio

C. 1.17

(rounded)

$232,710$198,7181.17

Cost of Good SoldInventory Cost


SLIDE TEACHER NOTEScustomers coming!

27

The correct answer is A. See the next slide for an explanation.

28

The correct answer is A. With the plethora of ratios in use to analyze a business’s financial statements, each one indicating some aspect of the business’s health, it’s important that students can discern good values from bad ones, and better ones from worse ones. This question gets to the heart of the matter: what can a business do to improve the indicator we’ve called the inventory turnover ratio? The answer is fairly obvious in both a business sense and a mathematical sense, but it’s important that students understand the ramifications in any case. In a business sense, greater sales is always a good thing (as long as you’re not running low on product to sell). If you sell more, the cost of goods sold will be greater. In a mathematical sense, the ratio is a fraction calculated with a numerator (sales, or cost of goods sold) and a denominator (inventory). For a given inventory, the larger the “cost of goods sold,” the greater the ratio will be. Thus, greater sales and a greater ratio is the most desirable choice.Some students may point out that a smaller inventory will also produce a higher inventory turnover ratio. Ask them: Which situation would be better for the business: 1) A comfortable inventory with high sales, or 2) a low inventory with high sales? The answer should be the first choice, because if the inventory is low, the business will not likely be able to sustain the high sales volume very much longer.You can probably make the benefit for a higher ratio more evident to your students by actually

Question 9CPS-Q9 Regarding the inventory turns ratio, which of the following would the store manager most like to see?A. More sales, and a higher

ratio.B. More sales, and a lower

ratio.C. More inventory, and a

lower ratio.D. Less inventory, and a

higher ratio.


A business always wants more sales!More sales will yield a higher inventory turnover ratio.Note: a lower inventory will also cause a higher ratio.

A. More sales, and a higher ratio.


SLIDE TEACHER NOTEScalculating some ratios. Using Nate’s sales numbers for the Latin section, for example, the ratio = 125/156 = 0.80 (rounded). Suppose 20 more Latin CDs had sold. Then. the ratio = 145/156 = 0.93 (rounded). So, the ratio is getting larger as more CDs from the inventory are sold.

29


30

The correct answer is B. The new sections all have a lower inventory turnover ratio than the store average of 1.17. Hence we know that the new sections are not selling as well as the rest of the store’s selections.As discussed on a previous slide, the math symbol here “<” means “is less than.” So, the notation used here is read “0.53 is less than 0.80 which is less than 0.92 which is less than 1.17.” In other words, the values are sorted from least to greatest, as we read the statement from left to right.To expound a bit more, an equivalent statement can be formed using the “greater than” symbol:

1.17 > 0.92 > 0.80 > 0.53from which we could draw the same conclusion: the Esperante inventory turnover ratio is greater than any of the three new music sections.

Question 10CPS-Q10

How do the turnover ratios of Nate’s new sections compare to Esperante’s quarterly turnover ratio (1.17)?A. They are all doing better than the rest of the store.B. None are performing as well as the store average.C. Latin and Alternative Rock are more popular; Hip-

Hop/Rap is worse.D. Hip-Hop/Rap is a hit; the other two are worse.


Hip-Hop/Rap: 0.92

Comparing Ratios

All the new types of music have a lower turnover ratio than the store’s quarterly value of 1.17.

0.53 < 0.80 < 0.92 < 1.17So, all the new types of music are selling worsethan the rest of the store’s music offerings.


Hip-Hop/Rap: 0.92

B. None are performing as well as the store average.


SLIDE TEACHER NOTES

31

Helps students think through this slide. For example, you might ask, “Why wouldn’t every industry strive for the same inventory turnover ratio?”Ask: “Mathematically speaking, what would make the ratio ‘low,’ or ‘small’ in value?” Answer: either a small numerator (low value for COGS, i.e., sales) or a large inventory (compared to the sales). Ask: “Can you think of any industries that have typically large and/or costly inventories that largely go unsold month after month?” (Examples: auto dealers, aircraft manufacturers, distillers, fur goods, heavy machinery manufacturers, steel industry, wineries, antique stores, hardware stores.)Ask: “Mathematically speaking, what would make the ratio ‘high,’ or ‘large’ in value?” Answer: either very strong sales (selling almost everything you have on hand) or insufficient inventories (essentially always running out of everything). So, while a high ratio can indicate great sales, it can also be an indicator of poor planning and lost sales (if you had more on hand, you could probably sell it, too!). Ask: “Can you think of any industries that typically have very rapid turnover of inventories, essentially clearing the shelves in short order on a regular basis?” (Examples: fast food industry, baking, cosmetics, dairy products, meat packing, gasoline stations, and generally speaking, industries dealing in perishable goods, and quick consumption, low cost item industries)Here’s a helpful listing of typical inventory turnover ratios for various types of businesses: http://www.bizstats.com/inventory.htm

Interpreting the Inventory Turnover Ratio

Should be compared against your industry averages.Some businesses have a very high turnover; others have a very low turnover.A low turnover ratio generally implies poor sales and/or large or excessive inventories. A high ratio implies either strong sales or insufficient inventories.


SLIDE TEACHER NOTES

32


33

The correct answer is B. A car dealership typically has thousands of dollars in inventory sitting on the shelf, waiting for customers to come in and request it. Another easy-to-understand example of low turnover is the heavy manufacturing industry. Airplane manufacturers, for example, take months to assemble an airplane. This means that the cost of all the goods and manpower required to complete just one plane must remain unsold for months, creating a necessarily low turnover ratio.In contrast, the other choices deal with primarily perishable or rapidly changing inventory items that are sold quickly, before they become outdated (as in the case of technology items, like cellular telephones) or spoiled (as in the case of food or flowers).

34

You can demonstrate to students how the annual sales data will typically be four times as great as the quarterly sales data, while the average inventory probably remains approximately the same. For this reason, the annual inventory turnover ratio will not surprisingly be about 4 times as great as the quarterly inventory turnover ratio. We can make comparisons easier by using the average sales (i.e., cost of goods sold) per day. But those ratio values will be quite small, so we invert the ratio and yield the number of days to “turn” the inventory. See further explanation on the next slide.

Question 11CPS-Q11

In general, which of the following businesses do you think would have a relatively low inventory turnover ratio?A. BakeryB. Auto PartsC. FloristD. Cellular phone company

Low Inventory Turnover Ratio

A typical automotive parts store has a large inventory of parts for many different car makes and models.The sales rate of any given part is relatively low.Low sales and large inventory lead to a low inventory turnover ratio.

B. Auto Parts

Another Comparison

When comparing turnover ratios, be sure to compare like time periods (e.g., monthly sales, quarterly sales, or annual sales).To make comparisons easier, a related measure is often used: Days to Turn theinventory.

AverageInventoryDays to TurnAverageCost of GoodsSold per Day


SLIDE TEACHER NOTES

35

Textbooks often greatly simplify this formula by assuming that the cost of goods figure is an annual value. In that case the average cost per day is found by simply dividing the annual figure by 365 days, and the formula becomes: Days to Turn =

Average Inventory * 365/Annual Cost of Goods SoldThis slide shows how students can apply a general formula for any period of sales data by using unit ratios to convert the period to days.Help students see how the units cancel in the expression on this slide. First, the dollars cancel. So if inventory happens to be “number of boxes,” or “pounds of product,” the result will not be correct because the “number of boxes” or “pounds of product” will not cancel with the “dollars” associated with the “cost of goods sold” figure. And similarly, show how the units of “quarter” cancel, and the units of “year.”If necessary, review how the unit ratios are formed and used: selecting numerators and denominators to represent equivalent amounts with different units (that is “1 year” is equivalent to “4 quarters,” “365 days” is equivalent to “1 year,” and so forth). The choice of numerator or denominator for each quantity is made such that the units “cancel” (that is, “qtr/qtr” = 1, “yr/yr” = 1) and we’re left with “days.” A possible source of confusion is whether to multiply by the unit ratio “365 d/1 yr” or “1 yr/365 d.” The answer is found by discerning which choice would result in being able to cancel the units we’re trying to “eliminate”. In our example we first wish to eliminate “qtr” and, so, multiply by “1 yr/4 qtr”. Next we wish to eliminate “yr” and, so, multiply by “365 /1 yr.”

Days to Turn Inventory

Using Esperante’s quarterly data, calculate Days to Turn. To get the result in terms of “days,” convert the “quarter of a year” to days by using unit ratios.

AverageInventoryDays to TurnAverageCost of GoodsSold per Day

$ Days to Turn 198,718

$232,710 per qtr

0.854 qtr

78 days (rounded)

1 yr4 qtr

365 days1 yr


SLIDE TEACHER NOTES

36

The correct answer is C. See the next slide for an explanation.

37

The correct answer is C. Obviously, it could take a little longer than 78 days to actually sell every bit of the store’s inventory. But for practical purposes, one could expect that the biggest portion of the store inventory would be cleared out in about three months (certainly more than one month, and probably less than six or twelve months), especially if there was serious advertising and aggressive pricing for a “going-out-of-business” sale.The Days to Turn is a pretty good indicator of the amount of customer business the store experiences.

38

There’s no better way to make a learning experience “real-world” than to use real-world data. And there is plenty of financial data available on the Internet for real companies. Yahoo! Finance (http://finance.yahoo.com) is an excellent source for such financial information on publicly traded companies. (See notes on next slide also.)Encourage students to do Internet research on topics like this (assuming that your school has the appropriate security filters and pop-up blockers in place to prevent undesirable results). For example, students can see if Esperante is performing as well as other stores that sell music. Below are some suggested video/music stores they can check, and the results using the quarterly financial data current at the time of this writing. It appears that the quarterly inventory turn ratio for the

Question 12CPS-Q12

If Esperante had a “going out of business sale,” approximately how long do you think it would take to sell most of it’s inventory of music?A. 1 weekB. 1 monthC. 3 monthsD. 6 monthsE. 1 year

Days to Turn Inventory

We calculated that Esperante’s“days to turn” was 78 days. That’s a little less than 3 months.“Days to Turn” is how many days it takes to sell through your business’ average inventory.

C. 3 months

Practice Problems

Examine the financial data on the following slide and calculate the inventory turnover ratio and days to turn for each.If possible, find up-to-date financial information on the Internet for these (and other) companies.

For example: http://finance.yahoo.comEnter the “stock ticker” (or use “Symbol Lookup”) for the company.Look for the links to the “financial statements.”


SLIDE TEACHER NOTESmusic/video industry ranges between 0.5 and 1.5, with the video stores tending to be higher. (Can you explain why? Hint: contrast videotape/DVD inventory with CD/tape/book inventory.) The performance of Esperante portrayed in this lesson falls about in the middle of the stores shown below. (In stark contrast, the quarterly ratio for McDonald's Corp—a very successful company in a very different industry—is about 25! They obviously don’t hold onto their inventory very long!)Blockbuster Video (BBI): 549,800/408,200=1.35 (68 days per turn)Borders Group (BGP): 627,300/1,271,700=0.49 (185 days per turn)Barnes & Noble (BKS): 1,067,978/1,525,834=0.70 (130 days per turn)Hastings (HAST): 82,426/144,755=0.57 (160 days per turn)Hollywood Entertainment (HLYW): 164,909/117,610=1.40 (65 days per turn)

39

On this slide we’ve provided you with a nice collection of real-world financial data from relatively familiar business names (gleaned from financial statements available from Yahoo! Finance, http://finance.yahoo.com, current at the time we created this presentation). Note that these are annual figures. If possible, have students visit the Yahoo! Site and glean current data from the financial reports for these companies (and others). The stock market symbols are provided in parentheses beside each corporation’s name. At the Yahoo! financial site, enter the stock market symbol, and then click the links on the left to the income statement (to find the cost of revenue—same as “cost of goods sold”) and the balance sheet (to find the inventory).You’ll notice that we’ve paired up somewhat similar businesses so that students can compare the turnover ratios and the days-to-turn values for comparable businesses. Click the “Solutions” button to show the calculated values (the answers!) for these figures on the next couple slides, after the students have made their own calculations. We encourage you to have the students make their own calculations before showing the answers.

Real World Financial Data*

* from Yahoo! Finance

Annual Data Annual Data (in thousands) (in thousands) Safeway Inc (SWY) Kroger Co (KR) Cost of Revenue $25,018,900 Cost of Revenue $39,637,000 Inventory $2,642,200 Inventory $4,169,000 ChevronTexaco Corp (CVX) Exxon Mobil Corp (XOM) Cost of Revenue $72,154,000 Cost of Revenue $129,928,000 Inventory $2,648,000 Inventory $8,957,000 Home Depot Inc (HD) Lowes Cos Inc (LOW) Cost of Revenue $44,236,000 Cost of Revenue $21,231,000 Inventory $9,076,000 Inventory $4,584,000 Microsoft Corp (MSFT) Apple Computer Inc (AAPL) Cost of Revenue $5,686,000 Cost of Revenue $4,499,000 Inventory $640,000 Inventory $56,000 Wal-Mart Stores Inc (WMT) Target Corp (TGT) Cost of Revenue $198,747,000 Cost of Revenue $31,790,000 Inventory $26,612,000 Inventory $5,343,000

SOLUTION


SLIDE TEACHER NOTES

40

Students should notice that the ratios and days-to-turn values are different for the various industries, and that they are similar within industries: Safeway and Kroger (grocery stores); Home Depot, and Lowes (hardware and building supplies). Of course, there are some differences within industries, too: notice Chevron and Exxon. What might explain the differences? (Perhaps different management choices?)

41

Students should notice that the ratios and days-to-turn values are different for the various industries, and that they are similar within industries. Of course, there are some differences within industries, too: notice Microsoft versus Apple. Comparable sales, but very different inventories. And Wal-Mart versus Target: Wal-Mart is clearly a much larger business, with the consequence that it can turn its inventory 25% faster than Target stores.

Calculating withReal World Financial Data*

Annual Data Annual Data (in thousands) (in thousands) Safeway Inc (SWY) Kroger Co (KR) Cost of Revenue $25,018,900 Cost of Revenue $39,637,000 Inventory $2,642,200 Inventory $4,169,000 Turnover Ratio 9.5 Turnover Ratio 9.5 Days to Turn 39 Days to Turn 38 ChevronTexaco Corp (CVX) Exxon Mobil Corp (XOM) Cost of Revenue $72,154,000 Cost of Revenue $129,928,000 Inventory $2,648,000 Inventory $8,957,000 Turnover Ratio 27.2 Turnover Ratio 14.5 Days to Turn 13 Days to Turn 25 Home Depot Inc (HD) Lowes Cos Inc (LOW) Cost of Revenue $44,236,000 Cost of Revenue $21,231,000 Inventory $9,076,000 Inventory $4,584,000 Turnover Ratio 4.9 Turnover Ratio 4.6 Days to Turn 75 Days to Turn 79

* from Yahoo! Finance MORE

Calculating withReal World Financial Data*

*from Yahoo! Finance

Annual Data Annual Data (in thousands) (in thousands)

Microsoft Corp (MSFT) Apple Computer Inc (AAPL) Cost of Revenue $5,686,000 Cost of Revenue $4,499,000 Inventory $640,000 Inventory $56,000 Turnover Ratio 8.9 Turnover Ratio 80.3 Days to Turn 41 Days to Turn 5 Wal-Mart Stores Inc (WMT) Target Corp (TGT) Cost of Revenue $198,747,000 Cost of Revenue $31,790,000 Inventory $26,612,000 Inventory $5,343,000 Turnover Ratio 7.5 Turnover Ratio 5.9 Days to Turn 49 Days to Turn 61

inventory turnover ratio notes - cord

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