Bowa Construction’s days sales outstanding is 50 days (on a 365-day basis). The company’s accounts receivable equal $100 million and its balance sheet shows inventory equal to $125 million. What is the company’s inventory turnover ratio? (Hint: start by finding total sales using DSO equation: DSO = Accounts Receivable/(sales/365) Select one: a. 5.84 b. 4.25 c. 3.33 d. 2.75 e. 7.25

The company’s inventory turnover ratio  is a. 5.84.

Daily sales equation = Accounts Receivable ÷ (sales ÷ 365 days)

50 days = $100 million ÷ (Sales ÷ 365 days)

Now

Sales is

= $100 million × 365 ÷ 50  days

= $730 million

Now  

Inventory turnover ratio = Sales ÷ Inventory

= $730 million ÷ $125 million

= 5.84 times

Hence, we can conclude that the inventory turnover ratio is 5.84 times

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a. 5.84

Explanation:

For computing the inventory tune over ratio first we have to find out the sales amount by applying the days sales equation which is shown below:

Daily sales equation = Accounts Receivable ÷ (sales ÷ 365 days)

50 days = $100 million ÷ (Sales ÷ 365 days)

So sales is

= $100 million × 365 ÷ 50  days

Sales = $730 million

And, we know that

Inventory turnover ratio = Sales ÷ Inventory

= $730 million ÷ $125 million

= 5.84 times

Hence, the inventory turnover ratio is 5.84 times

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