Business Applications Case Using ratios to make comparisons
The following accounting information pertains to Clemens Corp. and Twain Inc. at the end of 2009. The only difference between the two companies is that Clemens uses FIFO while Twain uses LIFO.
|
Clemens |
Twain |
|
|
Cash |
$ 75,000 |
$ 75,000 |
|
Accounts receivable |
200,000 |
200,000 |
|
Merchandise inventory |
150,000 |
100,000 |
|
Accounts payable |
160,000 |
160,000 |
|
Cost of goods sold |
600,000 |
650,000 |
|
Building |
250,000 |
250,000 |
|
Sales |
1,000,000 |
1,000,000 |
Required
a. Compute the gross margin percentage for each company, and identify the company that appears to be charging the higher prices in relation to its costs.
b. For each company, compute the inventory turnover ratio and the average number of days to sell inventory. Identify the company that appears to be incurring the higher inventory financing cost.
c. Explain why the company with the lower gross margin percentage has the higher inventory turnover ratio.