Average days in inventory …. 134 — The table below contains selected financial information included 2009 statements Saks Inc
Business & ManagementGeneralWorked Solution
The table below contains selected financial information included in the 2009 financial statements of Saks, Inc., and Dillards, Inc., two companies in the department store industry.
Required:
1. Calculate the 2009 gross profit ratio, inventory turnover ratio, and average days in inventory for both companies. Evaluate the management of each company's investment in inventory. Industry averages for these ratios are as follows:
Gross Profit ……………….. 25%
Inventory ………………….. 2.73
Average days in inventory …. 134
2. Obtain annual reports from three corporations in an industry other than autos and compare the management of each company's investment in inventory.
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SOLUTION
Requirement 1
($ in millions)
Saks Dillards
Gross profit ratio = 968 = 32%2,003 = 29%
3,030 6,831
Inventory turnover = 2,062 = 2.6 4,828 = 3.06
793 1,576.5
Average days = 365 = 140 days 365 = 119 days
in inventory 2.6 3.06
The gross profit ratios for the two companies are similar, and both are higher than the industry average. The inventory turnover ratios for the two companies reveal that, on average, it takes Saks 21 more days to sell its inventory than Dillards. This could be a reflection of more “higher end” merchandise sold at Saks which would also explain the slightly higher gross profit ratio of 32% compared to 29% for Dillards. Saks turns its inventory over 6 days slower than the industry average, Dillards 15 days faster.
Requirement 2
The objective of this requirement is to motivate students to obtain hands-on familiarity with actual annual reports and to apply the techniques learned in the chapter. You may wish to provide students with multiple copies of the same annual reports and compare responses. Another approach is to divide the class into teams who evaluate reports from a group perspective.