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 for public relations that his company look as good as possible. Due to the nature of the fresh 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:
Year Ending December 31
|
|
2014
|
2013
|
|
Fruits
|
$10,000
|
$9,000
|
|
Vegetables
|
30,000
|
33,000
|
|
Totals
|
$40,000
|
$42,000
|
Sales revenue for the year ending December 31, 2014, 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.
Required
1. Using the necessary calculations, explain how the president came up with an inventory turn- over ratio of 90 times.
2. Do you think the company should report a turnover ratio of 90 times? If not, explain why you disagree and explain, with calculations, what you think the ratio should be.
3. Assume that you are the controller for Garden Fresh. What will you tell the president?