Financial Reporting Financial Statement Analysis and Valuati

Financial Reporting, Financial Statement Analysis, and Valuation: A STRATEGIC PERSPECTIVE 9e

4.17 Calculating and Interpreting Inventory Turnover Ratios. Dell produces computers and related equipment on a made-to-order basis for consumers and busi- nesses. Sun Microsystems designs and manufactures higher-end computers that function as servers and for use in computer-aided design. Sun Microsystems sells primarily to businesses. It caalso provides services to business customers.in addition to,product sales of, computers. Selected data for each firm for three recent years appear in Exhibit 4.24. (Dell\'s fiscal year-end is in Janu- ary, Sun\'s fiscal year-end is in June. Subsequently, in 2010, Oracle acquired Sun.)

Solution

a.

Inventory turnover ratio

[cost of goods sold / average inventries]

49375/1021

= 48.22

48855/920

= 53.1

47433/618

= 76.75

Inventory turnover ratio

[cost of goods sold / average inventries]

5948 / 623

= 9.55

6639 / 602

=11.03

6778 / 532

=12.74

b. Reasons for the difference :-There is an increase in average inventories in DELL , whereas in SUN MICROSYSTEM , both increase and decrease can be seen

c. Trends:- In DELL, cost of goods sold is increasing due to positive changes in sales from previous year ,Whereas in SUN MICROSYSTEM , cost of goods sold is decreasing, but with the negative changes in sales from previous year

	Year 3	Year 2	Year 1
DELL
Inventory turnover ratio [cost of goods sold / average inventries]	49375/1021 = 48.22	48855/920 = 53.1	47433/618 = 76.75
SUN MICROSYSTEM
Inventory turnover ratio [cost of goods sold / average inventries]	5948 / 623 = 9.55	6639 / 602 =11.03	6778 / 532 =12.74