(Consider the effect of different inventories on the inventory turnover ratio, LO 7) Xena Inc. (Xena) is...
Question:
(Consider the effect of different inventories on the inventory turnover ratio, LO 7)
Xena Inc. (Xena) is an importer of gift items from Europe and Asia. Xena classifies its inventory into three categories: porcelain figurines, toys, and linens. Over the years Xena’s management has found that the success of the three categories has tended to vary, sometimes quite significantly, although fortunately for the company, poor performance of one category seems to be offset by success in another. On its balance sheet and income statement, Xena does not break down its Inventory, Sales, and Cost of Sales into three categories.
For its years ended October 31, 2004 and 2005, Xena reported inventory of
$1,670,000 and $1,733,000 respectively. For the fiscal year ended October 31, 2005, Xena reported sales of $7,844,000 and cost of sales of $3,854,500. However, the following breakdown of Inventory, Sales, and Cost of Sales has been made available to you:
Required:
a. Calculate the gross margin percentage, inventory turnover ratio, and the average number of days inventory on hand for the year ended October 31, 2005, using the aggregated amounts reported for inventory, sales, and cost of sales on Xena’s balance sheet and income statement.
b. Calculate the gross margin, inventory turnover ratio, and the average number of days inventory on hand for the year ended October 31, 2005 for each category of inventory that Xena carries.
c. What are the implications of the results you obtained in parts
(a) and
(b) of the question?
d. How is your ability to analyze Xena affected by the aggregated information presented in the company’s balance sheet and income statement versus the information that was made available to you? Explain fully.
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