Assignment task: Inventory Turnover
Garden Fresh Inc is a wholesaler of fresh fruits and vegetables. Each year, it submits a set of financial ratios to a trade association. Even though the association doesn't publish the individual ratios for each company, the president of Garden Fresh thinks it is important or public relations that his company look as good as possible. Due to the nature of the frest fruits and vegetables business, one of the major ratios tracked by the association is inventory turnover. Garden Fresh's inventory stated at FIFO cost was as follows:
2017 2016
Fruits 10,000 9,000
Vegetables 30,000 33,000
40,000 42,000
Sales revenue for the year ending December 31, 2017 is 3,690,000. The company's gross profit ratio is normally 40%.
Based on these data, the president thinks the company should report an inventory turnover ratio of 90 times per year.
1. Using the necessary calculations, explain how the president came up with an inventory turnover ratio of 90%.
2. Do you think the company should report a turnover ratio for 90 times? Explain why you agree or disagree and explain, with calculations, what you think.
3. Assume that you are the controller. What will you tell the president?