Exercises. Use of purchase orders and vendors invoices, locking all high-priced items in a cabinet

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1 Chapter 6 Inventories Study Guide Solutions Fill-in-the-Blank Equations 1. Units available for sale 2. Estimated selling price 3. Inventory turnover 4. Average daily cost of merchandise sold Exercises 1. Sunshine Books manager would like to review its inventory control procedures. The company currently utilizes purchase orders and vendors invoices. To speed sales, the company allows all employees access to inventory, although all items with a sales price over $100 are locked in a cabinet. What control procedures does Sunshine Books use to safeguard inventory? Use of purchase orders and vendors invoices, locking all high-priced items in a cabinet 2. Tortoise Cleaning Co. is worried about its high loss of inventory. The company is new and small, so all employees have access to all inventory. Because the company only uses a few vendors, it trusts that the items received are the same as the items ordered. The company has yet to implement a security system because the owner is usually present when the business is open. What inventory control procedures should the company implement to decrease inventory losses? Use of purchase orders, receiving reports, and vendors invoices; restrict access to inventory to select employees; lock high-priced items in a cabinet; install a security system 1

2 2 Chapter 6 3. Sierra Sub would like to improve its inventory control procedures. The company currently ensures that items ordered are received using purchase orders, receiving reports, and vendors invoices. The company has a high-priced security system over the inventory room, which the owner reviews regularly to ensure no wrong-doing. Because the owner is comfortable with his system, all employees are allowed access to the inventory room. Identify which procedures Sierra Sub should implement to safeguard its inventory. Restrict access to the inventory room to select employees and lock high-priced items in a cabinet Strategy: A company safeguards inventory by restricting physical access to the inventory and using checks to ensure that amounts at each level are correct. Purchase orders, receiving reports, and vendors invoices allow a company to cross-reference and check that inventory has not been stolen or misplaced. 4. Using the following information, calculate gross profit and ending inventory using a) FIFO, b) LIFO, and c) weighted-average cost methods under an inventory system that uses specific identification. The company sold 2 units for $50 each on August 27. Date Units Cost/unit Total Cost Aug. 10 Purchase 2 $11 $22 12 Purchase 2 $ Purchase 2 $22 44 Total 6 $96 Gross Profit Ending Inventory a. FIFO $78; ($100 $22) $74; ($30 + $44) b. LIFO $56; ($100 $44) $52; ($30 + $22) c. Weighted-average ($16 avg. cost) $68; [$100 (2 $16)] $64; (4 $16)

3 Inventories 3 5. Calculate gross profit and ending inventory using a) FIFO, b) LIFO, and c) weightedaverage cost methods under a specific identification inventory cost flow method. The company sold 3 units for $75 each on September 29. Date Units Cost Sept. 6 Purchase 1 $16 9 Purchase Purchase Purchase 1 28 Total 4 $88 Gross Profit Ending Inventory a. FIFO $165; [$225 ($16 + $20 + $24) $28 b. LIFO $153; [$225 ($28 + $24 + $20)] $16 c. Weighted-average ($22 avg. cost) $159; [$225 ($22 3)] $22 6. Using a) FIFO, b) LIFO, and c) weighted-average cost methods, calculate gross profit and ending inventory. The company uses a specific identification inventory cost flow method. On October 21, the company sold 5 units for $90 each. Date Units Cost/unit Total cost Oct. 2 Purchase 2 $21 $ 42 7 Purchase 2 $ Purchase 1 $ Purchase 4 $ Total 9 $234 Gross Profit Ending Inventory a. FIFO $336; [$450 ($42 + $44 + $28)] $120 b. LIFO $302; [$450 ($120 + $28)] $86; ($42 + $44) c. Weighted-average ($26 avg. cost) $320; [$450 ($26 5)] $104; (4 $26) Strategy: Under a specific identification method, the business can track which specific items were sold and which remain on hand at the end of the period. To calculate gross profit, determine which items were sold and the cost of each. Subtract the cost from the sales revenue to determine the gross profit. The ending inventory equals the specific products that were not sold during the period.

4 4 Chapter 6 7. With the information below, calculate the cost of merchandise sold for the month of October. The company uses a FIFO perpetual inventory system. The company did not have any beginning inventory. Date Units Cost/unit Total cost Oct. 1 Purchase 10 $40 $400 5 Purchase 12 $ Sale of 7 units 15 Purchase 15 $ Sale of 10 units Cost of merchandise sold: 7 units at $40 $ units: 3 at $ at $ $ At the beginning of November, Big Zero has an inventory balance of 20 units with a cost of $20 each. Assuming Big Zero uses a FIFO perpetual inventory system, calculate Big Zero s cost of merchandise sold for the month if the company has the following purchases and sales. Date Units Cost/unit Total Cost Nov. 3 Sale of 15 units 8 Purchase 6 $22 $ Purchase 3 $ Sale of 10 units Cost of merchandise sold: 15 units at $20 $ units: 5 at $ at $ $510

5 Inventories 5 9. PBJ Co. uses a FIFO perpetual inventory system. Calculate PBJ Co. s cost of merchandise sold for the month if the company has the following purchases and sales. Date Units Cost/unit Total Cost May 1 Beginning Inventory 14 $10 $140 5 Purchase 16 $14 $ Sale of 15 units 18 Sale of 5 units Cost of merchandise sold: 15 units:14 at $10 $140 1 at $ units at $14 70 $224 Strategy: A perpetual inventory system is always up to date. With many purchases and sales, the company creates layers of products from each purchase. Under FIFO, the company assumes that all of the oldest products (the first layer) are sold first until the layer is exhausted, even if there are other purchases (layers added) before the sale. Once the first layer is sold, the company sells the products at the next layer (the secondoldest products), and so on. T-accounts are helpful to visualize the layers and the sale of the layers. 10. Assume that the company in Exercise 7 uses a LIFO perpetual inventory system instead. Calculate the company s cost of merchandise sold. Cost of merchandise sold: 7 units at $42 $ units at $ $724 Merchandise Inventory Nov Nov

6 6 Chapter If Big Zero from Exercise 8 uses LIFO instead of FIFO, what will be the new cost of merchandise sold for the month? Cost of merchandise sold: 15 units at $20 $ units: 3 at $ at $ at $20 20 $533 Merchandise Inventory Nov. 3 & Nov Nov PBJ Co. decided to switch to LIFO inventory system. What is the new cost of merchandise sold for the month? Use the information from Exercise 9. Cost of merchandise sold: 15 units at $14 $210 5 units: 1 at $ at $10 40 $264 Merchandise Inventory May May 10 & Strategy: Under a LIFO perpetual system, the company s cost of merchandise comes from the most recent layer added to inventory. If layers are added between sales, the merchandise sold is pulled from the most recent purchase until it is completely sold. Once the most recent layer is diminished, the merchandise is pulled from the secondmost recent layer (the second-most recent purchase).

7 Inventories Using the weighted-average method, calculate cost of merchandise sold for the company in Exercise 7 for the month. Round total cost and unit cost to the nearest cent. Weighted-average unit cost: 10 units at $40 $400 On Oct units at $ $904 $904/22 units $41.09 Weighted-average unit cost: 15 units at $41.09 $ On Oct units at $ $1, $1,261.35/30 units $42.05 Cost of merchandise sold: 7 units at $41.09 $ units at $ $ Assume Big Zero uses a weighted-average method. Use the information in Exercise 8 to calculate the company s cost of merchandise sold. Round total cost and unit cost to the nearest cent. Weighted-average unit cost: 5 units at $20 $100 On Nov units at $ units at $27 81 $313 $313/14 units $22.36 Cost of merchandise sold: 15 units at $20 $ units at $ $523.60

8 8 Chapter If PBJ Co. from Exercise 9 switches to the weighted-average method, what will the cost of merchandise sold be? Round total cost and unit cost to the nearest cent. Weighted-average unit cost: 14 units at $10 $140 On May units at $ $364 $364/30 units $12.13 Cost of merchandise sold: 15 units at $12.13 $ units at $ $ Strategy: The weighted-average unit cost must be recalculated after each purchase. To find the weighted-average unit cost, first find the total cost of each purchase (layer) by multiplying the number of units purchased by the unit cost. Next, add the total purchase costs and divide the total cost of inventory by the total number of units. The cost of merchandise is found by multiplying the weighted-average unit cost by the number of units sold. 16. A retail company uses a FIFO periodic inventory method. The company s physical count at the end of the month shows a total of 20 units. Calculate the cost of merchandise sold for the month. Date Units Cost/unit Total cost Oct. 1 Purchase 10 $40 $400 5 Purchase 12 $ Sale of 7 units 15 Purchase 15 $ Sale of 10 units Ending Inventory: 15 units at $43 $645 5 units at $ $855 Beginning inventory, Oct. 1 $ Purchases ($400 + $504 + $645) 1,549 Cost of merch. available for sale in Oct. $1,549 Less ending inventory, Oct. 31 (855) Cost of merchandise sold $ 694

9 Inventories Big Zero uses a FIFO periodic inventory method. On November 1, the company has an inventory balance of 20 units, costing $20 each. The company s physical count at the end of the month gives a total of 4 units. Calculate the cost of merchandise sold for the month. Date Units Cost/unit Total Cost Nov. 3 Sale of 15 units 8 Purchase 6 $22 $ Purchase 3 $ Sale of 10 units Ending Inventory: 3 units at $27 $ 81 1 unit at $22 22 $103 Beginning inventory, Nov. 1 $ 400 Purchases ($132 + $81) 213 Cost of merch. available for sale in Oct. $ 613 Less ending inventory, Nov. 30 (103) Cost of merchandise sold $ PBJ Co. uses a FIFO periodic inventory system. The company shows the following transactions in its inventory for the month of May. At the end of May, a physical inventory count gives a total of 10 units on hand. Calculate the company s cost of merchandise sold for the month. Date Units Cost/unit Total Cost May 1 Beginning Inventory 14 $10 $140 5 Purchase 16 $14 $ Sale of 15 units 18 Sale of 5 units Ending Inventory: 10 units at $14 $140 Beginning inventory, May 1 $ 140 Purchases ($224) 224 Cost of merch. available for sale in Oct. $ 364 Less ending inventory, May 31 (140) Cost of merchandise sold $ 224

10 10 Chapter 6 Strategy: Under a periodic inventory system, cost of merchandise sold must be calculated. First, calculate the cost of merchandise available for sale, which includes the beginning inventory and purchases made during the period. A physical inventory count will give the units remaining at year end (which will be the most recent items purchased under a FIFO system because the first units purchased are sold first). The ending inventory is subtracted from the cost of the merchandise available for sale during the period to calculate the cost of the merchandise sold during the period. 19. Assume that the company in Exercise 16 uses a LIFO periodic inventory system. Calculate the cost of merchandise sold for the month. Ending Inventory: 10 units at $40 $ units at $ $820 Beginning inventory, Oct. 1 $ Purchases ($400 + $504 + $645) 1,549 Cost of merch. available for sale in Oct. $1,549 Less ending inventory, Oct. 31 (820) Cost of merchandise sold $ Big Zero (information in Exercise 17) now uses a LIFO periodic inventory system. Calculate the cost of merchandise sold for the month. Ending Inventory: 4 units at $20 $80 Beginning inventory, Nov. 1 $400 Purchases ($132 + $81) 213 Cost of merch. available for sale in Oct. $613 Less ending inventory, Nov. 30 (80) Cost of merchandise sold $533

11 Inventories PBJ Co. (information in Exercise 18) changes to a LIFO periodic inventory system. Calculate the cost of merchandise sold for the month of May. Ending Inventory: 10 units at $10 $100 Beginning inventory, May 1 $ 140 Purchases ($224) 224 Cost of merch. available for sale in Oct. $ 364 Less ending inventory, May 31 (100) Cost of merchandise sold $ 264 Strategy: Under a periodic inventory system, cost of merchandise sold must be calculated. First, calculate the cost of merchandise available for sale, which includes the beginning inventory and purchases made during the period. A physical inventory count will give the units remaining at year end (which will be the oldest items purchased under a LIFO system because the units purchased most recently are sold first). The ending inventory is subtracted from the cost of the merchandise available for sale during the period to calculate the cost of the merchandise sold during the period. 22. The retail company from Exercise 16 changes to a weighted-average periodic inventory system. Calculate the cost of merchandise sold for the month of October. Round the unit cost to the nearest cent. Weighted-average unit cost: $1,549/37 units $ Ending Inventory: 20 units at $41.86 $ Beginning inventory, Oct. 1 $ Purchases ($400 + $504 + $645) 1,549 Cost of merch. available for sale in Oct. $ 1,549 Less ending inventory, Oct. 31 (837.20) Cost of merchandise sold $

12 12 Chapter If Big Zero from Exercise 17 changes to a weighted-average periodic inventory system, what will the company s cost of merchandise sold be for the month of November? Round the unit cost to the nearest cent. Weighted-average unit cost: $613/29 units $ Ending Inventory: 4 units at $21.14 $ Beginning inventory, Nov. 1 $ 400 Purchases ($ ) 213 Cost of merch. available for sale in Oct. $ 613 Less ending inventory, Nov. 30 (84.56) Cost of merchandise sold $ If PBJ Co. from Exercise 18 adopts a weighted-average periodic inventory system, what will the company s cost of merchandise sold be for the month of May? Round the unit cost to the nearest cent. Weighted-average unit cost: $364/30 units $ Ending Inventory: 10 units at $12.13 $ Beginning inventory, Nov. 1 $ 140 Purchases ($224) 224 Cost of merch. available for sale in Oct. $ 364 Less ending inventory, Nov. 30 (121.30) Cost of merchandise sold $ Strategy: Under a periodic inventory system, a weighted-average unit cost is calculated at the end of the period rather than after each purchase such as under a perpetual inventory system. First, find the total cost of the entire inventory by multiplying the number of units by the cost of each unit and adding the sums. To find the unit cost, divide the total cost of the inventory by the total number of units. Multiply the weightedaverage unit cost by the number of units in the ending inventory (which is determined by a physical count). Subtract the cost of the ending inventory from the merchandise available for sale during the period to calculate the cost of merchandise sold for the period. 25. SubSlippers would like to reduce its income tax expense for the upcoming years by decreasing the company s net income. What type of inventory cost system should the company use in each situation? a. Use LIFO for a low net income b. Use FIFO for a low net income

13 Inventories Sun Cherries is trying to determine which inventory cost system to use. The company would like to have high current assets in its balance sheet. What type of inventory cost system would help the company to have high ending merchandise inventory balances in each situation? a. Use FIFO for a high ending merchandise inventory b. Use LIFO for a high ending merchandise inventory 27. Upon inception, Pocket Pals is trying to decide which inventory cost system would be best to match its goals. The company s shareholders want to increase their wealth with high gross profit. What type of inventory cost system would help the company have a high gross profit in each situation? a. Use FIFO for a high gross profit b. Use LIFO for a high gross profit Strategy: If prices of merchandise are increasing, LIFO will give a higher cost of merchandise sold because the most recent (and most expensive) merchandise inventory products are sold first. A high cost of merchandise yields a lower gross profit and a lower net income. LIFO will cause a lower ending inventory account balance under rising prices because the oldest (and least expensive) inventory items remain on hand. If prices of merchandise are decreasing, FIFO will give a higher cost of merchandise sold because the oldest (and most expensive) merchandise inventory products are sold first, creating a lower gross profit and net income. FIFO will give a lower ending inventory account balance under decreasing prices because the most recent (and least expensive) inventory items remain on hand. 28. Super Suds purchases 300 units of Product ABC for $8.90 per unit and 250 units of Product XYZ for $6.75 per unit. At year end, the market value for Product ABC is $8.55 and Product XYZ is $6.70. Apply the lower of cost or market to each inventory item to determine the value of the total inventory. Product # Units Cost per Unit Unit Market Value LCM Total LCM ABC 300 $8.90 $8.55 $8.55 $2,565 XYZ ,675 $4,240

14 14 Chapter Super Suds had the inventory items below on hand at year end. Some items had a decrease in the market price. a. $8, Product # Units Cost per Unit Unit Market Value Total Cost Total Market Value LCM DEF 290 $7.75 $7.45 $2, $2, $2, GHI , , , KLM , , , NOP , , , $8, b. $8, Product # Units Cost per Unit Unit Market Value Total Cost Total Market Value DEF 290 $7.75 $7.45 $2, $2, GHI , , KLM , , NOP , , $8, $8, Super Suds has the following in merchandise inventory at year end. Apply lower of cost or market to each situation to determine its value. a. $7,037 Product # Units Cost per Unit Unit Market Value Total Cost Total Market Value LCM S $2.30 $2.15 $ $ $ S , , , W , , , W , , , $7, b. $ Product # Units Cost per Unit Unit Market Value Total Cost Total Market Value S $2.30 $2.15 $ $ S , , W , , W , , $7, $7, Strategy: When determining the lower-of-cost-or-market value, first determine the total cost by multiplying the number of units on hand by the cost per unit. Next, determine the total market value by multiplying the number of units on hand by the unit market value. Use the lower of the total unit cost or the lower of market value, applying to either each inventory item, total inventory, or each class of inventory.

15 Inventories Capital Pets has inventory that has shown a decrease in value. The company purchased the merchandise for $490, but expects it can only sell the merchandise for $400. To make the sales, Capital Pets expects to incur advertising expenses of $40. Calculate the net realizable value for the merchandise inventory. Net realizable value = $360; $ Capital Pets has recovered select merchandise inventory after a recent fire. The merchandise inventory had minor damage that caused the market value to decline from $1,200 to $900. To sell the items, the company must incur the following: rental expenses of $200 to rent a temporary sales booth, sales commission of $150, and advertising expenses of $300. What is the net realizable value of the inventory? Net realizable value = $250; $900 ($200 + $150 + $300) 33. Moon Shapes has experienced a decrease in market value for its merchandise inventory from $2,900 to $2,100. The company expects to incur the following expenses in order to sell the items: sales commission of $450, advertising expenses of $200, and sales discounts of $500. What is the net realizable value of the inventory? Net realizable value = $950; $2,100 ($450 + $200 + $500) Strategy: To find net realizable value, or market value, of inventory, subtract all selling expenses incurred from selling the inventory from the market value. The original selling price is irrelevant in determining the net realizable value because the company will no longer receive this amount from the customer. 34. Otter Co. is valuing its inventory at year end. The company has on hand $22,000 in inventory in its warehouse. The company purchased $4,500 of inventory, which was shipped on December 29, 2015 with FOB shipping terms. The company didn t receive the items until after the year end. The company also shipped $6,900 of merchandise inventory to customers on December 27, 2015 with FOB shipping terms. The customers all received the items after year end. What should the company record as inventory at the year end? Inventory = $26,500; ($22,000 +$ 4,500) Otter Co. should include the merchandise in the warehouse and the inventory purchased. Because the inventory sold changes title at the shipping point, Otter Co. no longer owns the merchandise at year end.

16 16 Chapter Otter Co. has $16,700 of merchandise inventory in its warehouse as of the year end. Included in this amount is $1,400 of cosigned inventory, for which Otter Co. acts as a cosignee. Otter Co. did not include $2,400 of inventory that was shipped on December 29, 2015 to customers FOB destination. The customers received the items after year end. What should the company record as inventory on its balance sheet? Inventory = $17,700; ($16,700 $1,400 + $2,400) Otter Co. should exclude the cosigned inventory from its merchandise inventory because the cosignor owns the items until sale. The sold inventory does not change title until it reaches its destination, so the company should also include this at year end. 36. Otter Co. acts as a cosigner for $5,000 of merchandise inventory at retail locations. The company also has $8,900 of inventory in its warehouse. The company also has a purchase with shipping terms FOB destination in transit as of year end that includes $1,500 of merchandise. The company also has sales of $1,100 of merchandise in transit at year end that was shipped FOB destination. What should the company record as inventory on its balance sheet? Inventory = $15,000; ($5,000 + $8,900 + $1,100) Otter Co. should include the cosigned merchandise in its inventory because it is still the owner until sale. The company also should include the items in the warehouse and the sales in-transit because they have not yet reached their destination. Strategy: Inventory on the balance sheet at year end should include all merchandise the company has ownership of at year end. If purchases and sales are in transit at year end, the shipping terms determine if the company owns the products. If a business is a cosignor of inventory, the inventory is considered to be owned by the company until the sale. The cosignee never owns cosigned inventory and only has possession of the items. 37. At the beginning of 2015, Candle Co. has an inventory balance of $32,000. The company has a net income for the year of $56,000. Later, the accountant discovers an error that caused the beginning inventory to be understated by $6,000. a. $50,000 ($56,000 $6,000) b. There would be no effect as inventory errors reverse themselves within two years

17 Inventories Candle Co. performs an inventory count at year end for The company records an ending balance of $56,000 for inventory on its balance sheet. During the following year, the accountant discovers that the ending inventory was miscounted, causing ending inventory to be overstated by $2,500. a. Cost of merchandise sold understated, gross profit, and net income overstated by $2,500 b. Current and total assets and retained earnings overstated by $2, During 2016, Candle Co. realizes that its beginning inventory for the 2015 year was overstated by $3,200. Net income for 2015 was $19,250. a. $22,450 ($19,250 + $3,200) b. Current and total assets and retained earnings overstated by $3,200 Strategy: Beginning inventory has a direct relationship with cost of merchandise sold, meaning if the beginning inventory is understated, the cost of merchandise sold will also be understated. Ending inventory has an indirect relationship with cost of merchandise sold, meaning if beginning inventory is understated, the cost of merchandise sold will be overstated. If cost of merchandise sold is overstated, then gross profit will be understated, also causing net income to be understated. Net income flows to the balance sheet through retained earnings, which would also be understated. The understatement or overstatement of inventories will have a direct relationship with current and total assets. 40. Connection Section has the following amounts for 2015 and Calculate the inventory turnover for each year. Round answers to two decimal places. Also determine if the change is favorable or unfavorable for the company Beginning Inventory $ 2,590 $ 3,200 Ending Inventory 2,800 2,590 Cost of merchandise sold 13,200 15,650 Average inventory 2,695 2,895 Inventory turnover ($13,200/$2,695) ($15,650/$2,895) The number decreased, which is an unfavorable change.

18 18 Chapter Connection Section (CS) is comparing its inventory turnover to a competitor (MN) for With the amounts below, calculate the inventory turnover for each company. Round answers to two decimal places. Also determine if Connection Section is more or less efficient at managing inventory. CS MN Beginning Inventory $2,470 $3,900 Ending Inventory 2,200 4,900 Cost of merchandise sold 7,500 8,900 Average inventory 2,335 4,400 Inventory turnover ($7,500/$2,335) ($8,900/$4,400) CS is more efficient than MN at managing inventory because the company shows a higher inventory turnover for the year. 42. TimeTable has recently implemented new procedures in the hopes of increasing efficiency in managing inventory. With the information below, calculate the inventory turnover ratio. Round answers to two decimal places. If the company implemented the procedures in 2015, are they helping the company to improve? Beginning Inventory $ 7,900 $ 8,750 Ending Inventory 7,120 7,900 Cost of merchandise sold 14,500 15,200 Average inventory 7,510 8,325 Inventory turnover ($14,500/$7,510) ($15,200/$8,325) The procedures are helping to improve the efficiency and effectiveness of managing inventory because the inventory turnover ratio increased. Strategy: To calculate inventory turnover, first find the average inventory by averaging the beginning and ending inventories. Next, divide the cost of merchandise sold by the average inventory. A high inventory turnover indicates that the business can sell (or turn over ) the total inventory more frequently during the year.

19 Inventories With the following information, determine the number of days sales in inventory for 2015 and 2016, using a 365-day year. Round answers to two decimal places. Is the change a favorable or unfavorable trend? Cost of merchandise sold $340,000 $300,000 Beginning inventory 22,350 24,800 Ending inventory 26,900 22,350 Average inventory 24,625 23,575 Average daily cost of merchandise sold Number of days' sales in inventory ($24,625/$931.51) ($23,575/$821.92) The decrease in the number of days sales in inventory is a favorable trend for managing inventory. 44. Calculate the number of days sales in inventory for 2015 and 2016 for the following company using a 365-day year. Round answers to two decimal places. Also indicate if the change is favorable or unfavorable for managing inventory Cost of merchandise sold $289,000 $279,000 Beginning inventory 37,800 42,750 Ending inventory 38,600 37,800 Average inventory 38,200 40,275 Average daily cost of merchandise sold Number of days' sales in inventory ($38,200/$791.78) ($40,275/$764.38) The decrease in number of days sales in inventory indicates a favorable trend for the company.

20 20 Chapter Using the information in the table below, calculate the company s number of days sales in inventory for 2015 and Round answers to two decimal places. Also indicate the company shows a favorable or unfavorable trend in managing inventory Cost of merchandise sold $325,000 $322,300 Beginning inventory 68,500 66,200 Ending inventory 73,500 68,500 Average inventory 71,000 67,350 Average daily cost of merchandise sold Number of days' sales in inventory ($71,000/$890.41) ($67,350/$883.01) The increase in number of days sales indicates an unfavorable trend. Strategy: The number of days sales in inventory represents the number of days that the company takes to turn inventory into a sale. Companies prefer this number to be low. To calculate the number of days sales in inventory, find the average inventory by averaging the beginning and ending inventory. To calculate the average daily cost of merchandise sold, divide the cost of merchandise sold by the number of days in the year. The number of days sales in inventory is found by dividing the average inventory by the average daily cost of merchandise sold.