Herschel Inc. (Herschel) is a small chain of convenience stores. Herschel classifies its inventory into three categories: perishable items, packaged goods, and household items. On its balance sheet and income statement, Herschel doesn’t break down its inventory, sales, and cost of sales into three categories.

For its years ended December 31, 2013 and 2014 Herschel reported inventory of $568,000 and $742,600 respectively. For the fiscal year ended December 31, 2014 Herschel reported sales of $5,955,000 and cost of sales of $4,737,500. 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 December 31, 2014 using the aggregated amounts reported for inventory, sales, and cost of sales on Herschel’s balance sheet and income statement.

b. Calculate the gross margin percentage, inventory turnover ratio, and the average number of days inventory on hand for the year ended December 31, 2014 for each category of inventory that Herschel carries.

c. What are the implications of the results you obtained in parts

(a) and (b)? How is your ability to analyze Herschel 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.

Transcribed Image Text:

Inventory balance on Inventory balance on Sales for the October 31, October 31, year ended October 31, Category 2013 2014 2014 Cost of sales for the year ended October 31, 2014 Perishable items $ 42,500 $ 36,250 $2,020,000 $1,700,000 Packaged goods 155,000 260,100 1,700,000 1,402,500 Household items 370,500 446,250 2,235,000 1,635,000