Analyzing Gateway The Gateway financial statements and accompanying notes included in Appendix A provide information that can be used in responding to the following:

a. What amount of inventory is reported in the most recent consolidated balance sheet? What proportion of current assets and total assets does inventory make up? Did inventory increase or decrease in 1998? By what amount?

b. What amount of cost of goods sold was reported for 1998?

Compute the gross profit percentage for 1998 and the prior two years. Has the gross profit percentage remained relatively stable over this period, or has there been substantial change from year to year?

c. Inventory turnover is often calculated using average inventory for the year rather than the year-end balance.

Compute Gateway’s inventory turnover for 1998 using its average inventory balance. Using only the inventory balance at year end, what was Gateway’s inventory turnover for 1998? Is the turnover based on the average inventory balance greatly different from turnover based on the yearend balance? Is the difference enough to affect an investor or creditor’s decisions? Explain.

d. What proportion of Gateway’s inventory at December 31, 1998, is in the form of components and subassemblies versus finished goods? Why does Gateway not report any raw materials inventory?

e. If Gateway’s goals include keeping inventory levels no higher than 10 percent of current assets and attaining a gross profit percentage of at least 25 percent, was the company successful in 1998? How else might you assess Gateway’s inventory levels, inventory turnover, and gross profit percentage?