Norwel Company makes miniature circuit boards that are components of wireless phones and personalorganizers. The company has experienced strong growth, and you are especially interested in how wellNorwel is managing its inventory balances. You have collected the following information for the currentyear.
Inventory at the beginning of year $125.5 million
Inventory at the end of year, before any adjustments $116.7 million
Total cost of goods sold, before any adjustments $1,776.4 million
The company values inventory at lower of cost (using LIFO cost flow assumption) or market.
Compute Norwel's inventory turnover ratio for the current year Use a computer spreadsheet to prepare a schedule showing the impact of the following items onNorwel's inventory turnover ratio.
(a) During the year, Norwel recorded sales and costs of goods sold on $2 million of units shippedto various wholesalers on consignment. At year-end, none of these units have been sold bywholesalers.
(b) Shipping contracts changed 2 months ago from f.o.b. shipping point to f.o.b. destination.At the end of the year, $5 million of products are en route to China (and will not arrive untilafter financial statements are released). Current inventory balances do not reflect this changein policy.
(c) To be more consistent with industry inventory valuation practices, Norwel changed from LIFOto FIFO for its inventory of high-speed circuit boards. This inventory is currently carried at$724 million (cost of goods sold, $941 million). Data for this item of inventory for the year areas follows.
|
Month
|
Units Purchased
|
Inventory Sold
|
Price per Unit
|
Units Balance
|
|
Jan 1
|
100
|
|
3.10
|
100
|
|
Apr 10
|
150
|
|
3.20
|
250
|
|
Oct 20
|
|
130
|
|
120
|
|
Nov 20
|
250
|
|
3.50
|
370
|
|
Dec 15
|
|
150
|
|
220
|
Prepare a brief memorandum to Norwel's management discussing the advantages of adoptingthe LIFO cost flow assumption