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Chapter 2: 4DQ (page 112)

Explain the relationship between inventory turnover and purchasing needs.

Short Answer

Expert verified

There is a direct relationship between the inventory turnover and the purchasing needs. Higher turnover ratio indicates a higher sales of the company which further implies a greater need for purchases. A rapid inventory turnover rate also makes it easier to foresee future requirements and reduces the carrying costs.

Step by step solution

01

Purchasing needs

Purchasing need of the company means the requirement of the goods or raw material for processing the raw material into finished goods.

02

Inventory turnover ratio

The inventory turnover ratio is computed to measure the number of times inventory is sold during the reporting period. If the inventory turnover of the company increases then it may increase the purchasing raw materials or requirements of the company and vice-versa. In addition, the rapid turnover rate will make predicting future requirements easier and reduce the carrying costs.

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Most popular questions from this chapter

a. Swank Clothiers had sales of \(383,000 and cost of goods sold of \)260,000. What is the gross profit margin (ratio of gross profit to sales)?

b. If the average firm in the clothing industry had a gross profit of 25 percent,

how is the firm doing?

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)

c. Fixed asset turnover

Amigo Software Inc. has total assets of \(889,000, current liabilities of\)192,000, and long-term liabilities of \(154,000. There is \)87,000 in preferredstock outstanding. Thirty thousand shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $56,300 in earnings available to common stockholders and the

firm鈥檚 stock has a P/E of 23 times earnings per share, what is the currentprice of the stock?

c. What is the ratio of market value per share to book value per share? (Round

to two places to the right of the decimal point.)

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

a. The interest coverage.

Times mirror and glass company

Sales

\(126,000

Less: Cost of goods sold

93,000

Gross profit

\)33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\(18,000

Less: Interest expenses

3,000

Earning before taxes

\)15,000

Less: Taxes (30%)

4,500

Earning after taxes

$10,500

*equal income before interest and taxes

Jerry Rice and Grain Stores has \(4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has \)123,000 in current liabilities and $349,000 in long-term liabilities.

a. What is its return on stockholders鈥� equity?
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