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Headquartered in Toronto, Indigo Books & Music Inc. (TSX: IDG) is Canadas largest book retailer and the third largest in North America. The following information

Headquartered in Toronto, Indigo Books & Music Inc. (TSX: IDG) is Canadas largest book retailer and the third largest in North America. The following information was taken from the management discussion and analysis section of the companys March 31, 2020, annual report (in thousands):

2020

2019

2018

Cost of sales (cost of goods sold)

$600,400

$585,700

$538,500

Inventories

$229,706

$232,694

$224,406

Additional information from the companys annual report:

1. Inventories are valued at the lower of cost, determined using a moving average cost formula, and market, being net realizable value. Under this method, inventory is recorded at the level of the individual article (stock-keeping unit or SKU).

2. Costs include all direct and reasonable expenditures that are incurred in bringing inventories to their present location and condition. Vendor rebates are recorded as a reduction in the price of the products and corresponding inventory is recorded net of vendor rebates.

3. The average cost of an article is continually updated based on the cost of each purchase recorded in inventory. When the company permanently reduces the retail price of an item, there is a corresponding reduction in inventory recognized in the period if the markdown incurred brings the retail price below the cost of the item.

4. The amount of inventory write-downs as a result of net realizable value lower than cost was $10.3 million in 2020 ($7.3 million in fiscal 2019), and there were no reversals of inventory write-downs that were recognized in 2020 or in prior

periods. The amount of inventory at March 31, 2020 with net realizable value equal to cost was $1.7 million ($2.3 million at March 31, 2019).

(a) Calculate the companys inventory turnover and days sales in inventory ratios for 2020 and 2019. Comment on whether Indigos management of its inventory improved or weakened in fiscal 2020.

Inventory Turnover

Days Sales in Inventory

2020

2019

(b) Does Indigo follow the lower of cost or net realizable value rule? Did the application of this rule have any effect on 2020 results? Explain (c) Indigo uses the average cost formula to account for its inventories. A major competitor, Amazon Inc., uses the FIFO cost formula to account for its inventories. What difficulties would this create in comparing Indigos financial results with those of Amazon? Explain.

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