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Inventory Turnover - YouTube
Channel: Learn Accounting with Iana Zemniakova, CPA
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hello and welcome to financial
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accounting our topic today is inventory
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turnover
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we will look at how it is calculated and
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used in decision making
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we will also look at the inventory
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turnover of target cooperation and how
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it is compared to its competitors
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[Music]
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[Applause]
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[Music]
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it is important to remember that the
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real value of accounting information is
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how it supports decision making
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significant professional judgment and
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attention to detail are essential
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but what ultimately matters is how users
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of financial information
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such as investors creditors management
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and others can make well-informed
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decisions based on fair and accurate
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information provided by accounting
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the accounting processes and information
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systems that underlie a company's
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financial statements provide a lot of
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that information
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we looked at inventory in previous
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videos and already learned that
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inventory can be the largest of a
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company's current assets
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the next questions to ask are how liquid
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inventory is
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and how quickly it can be converted into
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cash
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to answer these questions creditors
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compute the inventory turnover
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inventory turnover equals the cost of
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goods sold divided by the average amount
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of inventory
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the average amount of inventory is
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beginning inventory plus ending
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inventory divided by two the inventory
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turnover ratio
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indicates how many times during the year
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the company can sell the amount of its
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average inventory
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note that the higher this rate the more
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quickly the company sells its inventory
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and the more money it makes
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the average number of days to sell
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inventory ratio
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measures how many days on average it
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takes to sell inventory
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it is calculated as the number of days
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in the year divided by inventory
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turnover
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by the way you can find more videos
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about inventory in the playlist for
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chapters 6 and 8.
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now let's look at an example
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for our example we are going to use
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target corporation
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target is a publicly traded company
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whose financial statements are posted on
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the company's website
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you can find all the necessary
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information on target's website
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look for the investor page then sec
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filing
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you need the most recent annual form
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called 10k
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select annual filing
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and the year
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then open the form
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once you open it search for financial
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statements the cost of goods also called
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the cost of sales
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can be found on the income statement or
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statement of operations
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the inventory numbers are on the balance
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sheet
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the beginning inventory for the current
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year is the same as the ending inventory
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for the previous year
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the fiscal year 2021 income statement of
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target corporation
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shows a cost of goods sold of 74 billion
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963 million dollars
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the balance sheet shows
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13 billion
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902 million in inventory as of the end
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of the fiscal year 2021
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and 10 billion
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653 million as of the end of fiscal year
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2020.
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if you are curious why the fiscal year
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2021 ends on january 29 2022
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look at the notes to financial
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statements called fiscal year
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as stated in the notes to financial
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statements
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target's fiscal year ends on the
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saturday nearest january 31st
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unless otherwise stated
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references to years in the 10k report
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relate to fiscal years rather than to
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calendar years
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fiscal
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2021 2020
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and 2019
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ended january 29 2022
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january 30 2021
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and february 1st 2020 respectively
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and consisted of 52 weeks
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note that the ending inventory for the
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fiscal year 2020
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is the beginning inventory for the
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fiscal year 2021.
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these are the numbers we will use in our
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inventory turnover calculation
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an average inventory is 12 billion
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278 million dollars
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an average inventory is calculated as a
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beginning inventory of 10 billion 653
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million
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plus an ending inventory of 13 billion
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902 million divided by two
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the inventory turnover rate for target
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therefore is six 6.11
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it is calculated as follows
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74 billion
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963 million dollars
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divided by 12 billion
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278 million dollars
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we may compute the number of days
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required for the company to turn over or
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sell its inventory by dividing
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365 days by the turnover rate of 6.11
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in the fiscal year 2021 target required
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59.78 days to turn over or sell the
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amount of its average inventory
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i also looked at a couple of priors and
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put together a table to see how the
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numbers changed over the years
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before we look at the historical numbers
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let's review where the amounts used in
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the inventory turnover calculation come
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from
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the cost of goods sold can be found on
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the income statement
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and inventory balances can be found on
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the balance sheet
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inventory turnover is helpful for users
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of financial statements as it helps
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evaluate the liquidity of the company's
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inventory
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managers and independent auditors may
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use inventory turnover to help identify
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inventory that is not selling well and
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may have become obsolete
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a decline in turnover indicates that
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merchandise is not selling as quickly as
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in the
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past looking at prior fiscal years we
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can see that target improved its
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inventory turnover from 6.05 in the
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fiscal year 2017
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to 6.11 in the current fiscal year
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it took
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59.78 days to sell average inventory in
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2021
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compare it to
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60.35 days in 2017.
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while the difference might look small it
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is significant since target sells
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billions of dollars of merchandise
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comparing a company's inventory to
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nowhere with competitors is particularly
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helpful in evaluating how effectively a
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company is managing its inventory which
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is often one of its most significant
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assets
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there are a lot of websites that publish
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financial information on publicly traded
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corporations
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pinbox.com is one of them
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let's look at the inventory turnover of
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target's competitors
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we can see that the most efficient
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company on the list is kaska with
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approximately 12.1 inventory turnover
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ratio
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and the least efficient is dealers with
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approximately 2.9 inventory turnover
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ratio
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target corporation is somewhat in the
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middle
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a low turnover ratio can be a leading
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indicator of poor sales or excess
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inventory
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while a high ratio may indicate strong
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sales
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i hope you found this video helpful if
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you did please make sure to subscribe
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hit that like button and ring the
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notification bell so you're notified
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when we release more videos like this
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thank you all so much for watching and i
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hope to see you all again in the next
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video
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[Music]
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[Applause]
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[Music]
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