Magna International Inc. is a Canadian company operating internationally, supplying technologically advanced automotive components, assemblies, systems, and modules, and engineering and assembling complete vehicles mostly for sale to original equipment manufacturers. Because it is a manufacturing company, its inventory is composed of raw materials, work in process, and finished goods. Note 7, Inventories, from its 2009 financial statements is included in Exhibit 7-16. Magna's financial statements are in millions of U.S. dollars.
Magna's cost of goods sold was $15,697 million and $20,982 million for 2009 and 2008, respectively.
Required:
a. The tooling and engineering inventory is created when Magna does work for a customer, but the customer has not yet been invoiced by Magna for all of the work completed to date. Why is it appropriate to include these costs as inventory? Explain.
b. Calculate the inventory turnover for Magna in 2009 and 2008 using the inventory value for the given year rather than the average inventory.
i. Cost of goods sold divided by total inventory
ii. Cost of goods sold divided by finished goods inventory
iii. Cost of goods sold divided by finished goods plus tooling and engineering inventory
c. Which of the ratios calculated in part "b" do you think is more useful? Why?