Accounting Concepts for Healthcare Professionals
January 13, 2014Tops Company is a business with the main focus on entertainment and confectionery. The purpose of this assignment is to identify Top’s inventory turnover ratio, average days to sell inventory, the quality status of their management of inventory, and what cost flow methods they utilized.
In order to figure out the turnover ratio one must do calculations. Cost of goods sold divided by inventory results in the answer. (Edmonds, Olds, McNair,& Tsay 2010) The equation just figures out how many times the balance of the inventory is sold, aka “turned over”. (Edmonds, Olds, McNair,& Tsay 2010) Once we figure that out we divide 365 by the inventory turnover and that calculates the average day it takes to sell the inventory. In 2006, they had a turnover rate of 5.38 and 5.74 in 2005. It took tops an average of 68 days in 2006 to sell their inventory and about 64 days in 2005 to do the same. (Edmonds, Olds, McNair,& Tsay 2010) With this information it can be seen that it took tops company about four more days to sell their inventory in 2005 than in 2006. In that year progression it is obvious to point out that they did a little worse than the year before. Knowing that information now may be able to help the company improve their turnover in the years to come.
The cost flow method they used to account for their inventory was the first in/first out method “The cost flow method a company uses can significantly affect the gross margin reported in the income statement.”(Edmonds, Olds, McNair,& Tsay 2010) The first-in, first-out method requires that the first items purchases should be assigned to cost of goods sold. (Edmonds, Olds, McNair,& Tsay 2010)
Now that inventory turnover and average days of inventory sales have been established Tops Company can use this information to plan for the next year and successfully make changes to improve. They know that 2006 there was…