McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Reporting and Interpreting Inventories and Cost of Goods Sold PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA Learning Objective 1 Describe the issues in managing different types of inventory. 7-3 Inventory Management Decisions The primary goals of inventory managers are to: 1. Maintain a sufficient quantity to meet customers’ needs 2. Ensure quality meets customers’ expectations and company standards 3. Minimize the costs of acquiring and carrying the inventory 7-4 Types of Inventory Merchandisers . . . Buy finished goods. Sell finished goods. Merchandise inventory Manufacturers . . . Buy raw materials. Produce and sell finished goods. Raw Materials Work in Process Finished goods Completed products awaiting sale Materials waiting to be processed Partially complete products 7-5 Learning Objective 2 Explain how to report inventory and cost of goods sold. 7-6 Balance Sheet and Income Statement Reporting 7-7 Cost of Goods Sold Equation BI + P – CGS = EI American Eagle Outfitters’ beginning inventory was $4,800. During the period, the company purchased inventory for $10,200. The cost of goods sold for the period is $9,000. Compute the ending inventory. + = – = 7-8 Cost of Goods Sold Calculation Beginning Inventory $ 4,800 Purchases 10,200 Cost of Goods Available for Sale 15,000 Cost of Goods sold 9,000 Ending Inventory $ 6,000 Cost of Goods Sold Equation Beginning Inventory $4,800 + Purchases $10,000 Goods Available for Sale $15,000 7-9 Ending Inventory $6,000 Cost of Goods Sold $9,000 (Balance Sheet) (Income Statement) Learning Objective 3 Compute costs using four inventory costing methods. 7-10 Inventory Costing Methods Specific identification First-in, first-out (FIFO) Last-in, first-out (LIFO) Weighted average 7-11 Inventory Costing Methods Consider the following information May 3 May 5 May 6 May 8 Purchased 1 unit for $70 Purchased 1 more unit for $75 Purchased 1 more unit for $95 Sold 2 units for $125 each May 6 $95 cost May 5 $75 cost May 3 $70 cost Specific Identification This method individually identifies and records the cost of each item sold as part of cost of goods sold. If the items sold were identified as the ones that cost $70 and $95, the total cost of those items ($70 + 95 = $165) would be reported as Cost of Goods Sold. The cost of the remaining item ($75) would be reported as Inventory on the balance sheet at the end of the period. 7-12 Inventory Costing Methods LIFO May 6 $95 cost 7-13 Sold May 3 $70 cost Still there Sold May 5 $75 cost Weighted average May 6 $95 cost May 6 $95 cost May 5 $75 cost May 5 $75 cost May 3 $70 cost May 3 $70 cost Income Statement Net Sales $ 250 Cost of Goods Sold 145 Gross Profit $ 105 Income Statement Net Sales $ 250 Cost of Goods Sold 170 Gross Profit $ 80 Balance Sheet Inventory $ 95 Balance Sheet Inventory $ 70 Still there FIFO $240 = $80 per unit 3 Income Statement Net Sales $ 250 Cost of Goods Sold 160 Gross Profit $ 90 Sold Balance Sheet Inventory $ 80 Still there Inventory Costing Methods Summary Cost of Goods sold (Income Statement) Inventory (Balance sheet) FIFO Oldest cost Newest cost Weighted LIFO Average Newest cost Average cost Oldest cost Average cost Let’s consider a more complex example. Date Oct 1 Oct 3 Oct 5 Oct 6 7-14 Description Beginning Inventory Purchase Purchase Sales Ending Inventory # of Units Cost per Unit 10 7 30 8 10 10 (35) To calculate 15 To calculate Total Cost $ 70 240 100 To calculate To calculate Inventory Cost Flow Computations FIFO 10 units × 30 units × 10 units × Cost of Goods Available for Sale – Ending Inventory = Cost of Goods Sold Beginning Inventory + Purchases $ 7 = $ 70 $ 8 = 240 $ 10 = 100 $ 410 140 $ 270 (10 units @ $10) + (5 units @ $8) (10 units @ $7) + (25 units @ $8) 7-15 Inventory Cost Flow Computations LIFO 10 units × 30 units × 10 units × Cost of Goods Available for Sale – Ending Inventory Cost of Goods Sold Beginning Inventory + Purchases $ 7 = $ 70 $ 8 = 240 $ 10 = 100 $ 410 110 $ 300 (10 units @ $7) + (5 units @ $8) (10 units @ $10) + (25 units @ $8) 7-16 Inventory Cost Flow Computations Weighted Average Description Beginning Inventory Purchase Purchase Cost of Goods Available for Sale Weighted = Average Cost Weighted = Average Cost 7-17 # of Units 10 30 10 50 Cost per Unit 7 8 10 Total Cost $ 70 240 100 $ 410 Cost of goods Available for Sale Number of Units Available for Sale $410 50 units = $8.20 per unit Inventory Cost Flow Computations Weighted Average 10 units × 30 units × 10 units × Cost of Goods Available for Sale – Ending Inventory Cost of Goods Sold Beginning Inventory + Purchases $ 7 = $ 70 $ 8 = 240 $ 10 = 100 $ 410 123 $ 287 15 units @ $8.20 35 units @ $8.20 7-18 Financial Statement Effects 7-19 Effects on the Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Income from Operations Other Revenue (Expenses) Income before Income Tax Expense Income Tax Expense (30%) Net Income FIFO $ 525 270 255 125 130 20 150 45 $ 105 LIFO $ 525 300 225 125 100 20 120 36 $ 84 Weighted Average $ 525 287 238 125 113 20 133 40 $ 93 Effects on the Balance Sheet Inventory $ $ $ 140 110 123 Financial Statement Effects Effects of Increasing Costs on the Financial Statements Inventory (Balance sheet) Cost of Goods Sold (Income Statement) FIFO Higher Lower LIFO Lower Higher Effects of Decreasing Costs on the Financial Statements Inventory (Balance sheet) Cost of Goods Sold (Income Statement) 7-20 FIFO Lower Higher LIFO Higher Lower Financial Statement Effects Advantages of Methods Weighted Average First-In, First-Out Last-In, First-Out Smoothes out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. 7-21 Tax Implications and Cash Flow Effects 7-22 Effects on the Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Income from Operations Other Revenue (Expenses) Income before Income Tax Expense Income Tax Expense (30%) Net Income FIFO $ 525 270 255 125 130 20 150 45 $ 105 LIFO $ 525 300 225 125 100 20 120 36 $ 84 Weighted Average $ 525 287 238 125 113 20 133 40 $ 93 Effects on the Balance Sheet Inventory $ $ $ 140 110 123 Learning Objective 4 Report inventory at the lower of cost or market. 7-23 Lower of Cost or Market The value of inventory can fall below its recorded cost for two reasons: 1. it’s easily replaced by identical goods at a lower cost, or 2. it’s become outdated or damaged. When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower market value. This is known as the lower of cost or market (LCM) rule. 7-24 Lower of Cost or Market 1,000 items @ $165 Item Leather coats Vintage jeans 1 Cost per Item $165 20 Analyze Assets Inventory –15,000 2 7-25 Record Market Value per Item $ 150 25 LCM Total Lower per of cost Total Item Quantity or Market cost Writedown $ 150 1,000 $ 150,000 $ 165,000 $ 15,000 20 400 8,000 8,000 - 400 items @ $20 1,000 items @ $150 = Liabilities + Stockholders' Equity Cost of Goods sold (+E) –15,000 Learning Objective 5 Analyze and record inventory purchases, transportation, returns and allowances, and discounts. 7-26 Recording Inventory Transactions We will now look at the accounting for purchases, transportation costs, purchase returns and allowances, and purchase discounts. We will record all inventory-related transactions in the Inventory account. 7-27 Inventory Purchases American Eagle Outfitters purchases $10,500 of vintage jeans on credit. 1 Analyze Assets Inventory –10,500 2 Record 7-28 = Liabilities + Accounts Payable +10,500 Stockholders' Equity Transportation Cost American Eagle pays $400 cash to a trucker who delivers the $10,500 of vintage jeans to one of its stores. 1 Analyze Assets Cash - 400 Inventory + 400 2 Record 7-29 = Liabilities + Stockholders' Equity Purchase Returns and Allowances American Eagle returned some of the vintage jeans to the supplier and received a $500 reduction in the balance owed. 1 Analyze Assets Inventory - 500 2 Record 7-30 = Liabilities Accounts Payable - 500 + Stockholders' Equity Purchase Discounts American Eagle’s vintage jeans purchase for $10,500 had terms of 2/10, n/30. Recall that American Eagle returned inventory costing $500 and received a $500 reduction in its Accounts Payable. American Eagle paid within the discount period. 1 Analyze Assets Cash - 9,800 Inventory -200 2 Record 7-31 = Liabilities + Accounts Payable -10,000 Stockholders' Equity Summary of Inventory Transactions 7-32 Learning Objective 6 Evaluate inventory management by computing and interpreting the inventory turnover ratio. 7-33 Inventory Turnover Analysis 7-34 Comparison to Benchmarks 7-35 Supplement 7A FIFO, LIFO, and Weighted Average in a Perpetual Inventory System Perpetual Inventory System This is the same information that we used earlier in the chapter to illustrate a periodic inventory system. The only difference is that we have assumed the sales occurred on October 4, prior to the final inventory purchase. Date Oct 1 Oct 3 Oct 4 Oct 5 7-37 Description Beginning Inventory Purchase Sales Purchase Ending Inventory # of Units Cost per Unit 10 7 30 8 (35) To calculate 10 10 15 To calculate Total Cost $ 70 240 To calculate 100 To calculate FIFO (First-in, First-Out) 7-38 LIFO (Last-in, First-Out) 7-39 Weighted Average Cost $310 ÷ 40 units = $7.75 per unit 7-40 Financial Statement Effects Summary of Perpetual Inventory System Cost Flow Assumptions on Financial Statements 7-41 Supplement 7B The Effects of Errors in Ending Inventory The Effects of Errors in Ending Inventory Cost of Goods Sold Equation BI + P – CGS = EI Errors in Ending Inventory will affect the Balance Sheet and the Income Statement. Assume that Ending Inventory was overstated in 2009 by $10,000 due to an error that was not discovered until 2010. 2009 Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold 7-43 Accurate Accurate Overstated $10,000 Understated $10,000 The Effects of Errors in Ending Inventory Now let’s examine the effects of the 2009 Ending Inventory Error on 2010. Assume that Ending Inventory was overstated in 2009 by $10,000 due to an error that was not discovered until 2010. 2010 Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold 7-44 Overstated $10,000 Accurate Accurate Overstated $10,000 Supplement 7C Recording Inventory Transactions in a Periodic System Recording Inventory Transactions in a Periodic System A local cell phone dealer stocks and sells one item, the MOTORAZR phone. The following events occurred in the past year: Jan. 1 Apr. 14 Nov. 30 Dec. 31 Beginning inventory: 80 units at a cost of $60. Purchased 170 additional units on account at a cost of $60. Sold 150 units on account at a unit sales price of $80. Counted 100 units at a unit cost of $60. We will record these events assuming the company uses a periodic inventory system and then compare the periodic inventory system to a perpetual inventory system. 7-46 Recording Inventory Transactions in a Periodic System Periodic Inventory System 7-47 Perpetual Inventory System Recording Inventory Transactions in a Periodic System Periodic Inventory System BI + P – CGS = EI End-of-year adjustment entries are not required using a perpetual inventory system. 7-48 Recording Inventory Transactions in a Periodic System Summary of the Effects on the Accounting Equation Periodic Inventory System 7-49 Perpetual Inventory System Chapter 7 Solved Exercises M7-6, M7-7, E7-3, E7-5, E7-10, E7-17 M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost Given the following information, calculate cost of goods available for sale and ending inventory, then sales, cost of goods sold, and gross profit, under (a) FIFO, (b) LIFO, and (c) weighted average. Assume a periodic inventory system is used. 7-51 M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost a. FIFO Beginning Inventory 100 units × $10 = $1,000 + Purchase 500 units × $13 = 6,500 Cost of Goods Available for Sale 7,500 – Ending Inventory (400 × $13) = 5,200 = Cost of Goods Sold (100 × $10) + (100 × $13) = $2,300 7-52 M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost b. LIFO Beginning Inventory 100 units × $10 + Purchase 500 units × $13 Cost of Goods Available for Sale – Ending Inventory (100 × $10) + (300 × $13) = Cost of Goods Sold (200 × $13) 7-53 = $1,000 = 6,500 7,500 = 4,900 = $2,600 M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost c. Weighted Average Beginning Inventory 100 units × $10 = $1,000 + Purchase 500 units × $13 = 6,500 Cost of Goods Available for Sale 7,500 = 5,000 – Ending Inventory (400 × $12.50) = Cost of Goods Sold (200 × $12.50) = $2,500 Weighted Average Cost 7-54 = $7,500 600 units = $12.50 per unit M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost Sales (200 units @ $15) Cost of Goods Sold Gross Profit 7-55 FIFO $ 3,000 2,300 $ 700 Weighted LIFO Average $ 3,000 $ 3,000 2,600 2,500 $ 400 $ 500 M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory) Given the following information, calculate the cost of goods available for sale, ending inventory, and cost of goods sold, assuming a periodic inventory system is used in combination with (a) FIFO, (b) LIFO, and (c) Weighted Average Cost. 7-56 M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory) Goods available for sale – same for all methods Beginning Inventory + Purchase (July 13) + Purchase (July 25) Goods Available for Sale 7-57 Units 2,000 6,000 8,000 16,000 Unit Total Cost $ 20 22 25 Cost $ 40,000 132,000 200,000 $ 372,000 M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory) a. FIFO: Ending Inventory 7-58 (7,000 units x $25) $175,000 Cost of Goods Sold (2,000 units x $20) (6,000 units x $22) (1,000 units x $25) $197,000 M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory) c. Weighted average : Average unit cost Ending Inventory Cost of Goods Sold 7-59 $372,000 ÷ 16,000 = $23.25 per unit (7,000 units × $23.25) = $162,750 (9,000 units × $23.25) = $209,250 E7-3 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for the 2010 income statement of Lewis Retailers for each of the following independent cases. Sales Beginning Total Ending Case Revenue Inventory Purchases Available Inventory A $ 800 $ 100 $ 700 ? $ 500 B 900 200 700 ? ? C ? 150 ? ? 250 D 800 ? 600 ? 250 7-60 Cost of Income Goods Gross Operating from Sold Profit Expenses Operations ? ? $ 200 ? ? ? 150 0 200 400 100 ? ? ? 250 100 E7-3 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for the 2010 income statement of Lewis Retailers for each of the following independent cases. Sales Beginning Total Ending Case Revenue Inventory Purchases Available Inventory A $ 800 $ 100 $ 700 $ 800 $ 500 B 900 200 700 900 ? 150 ? C ? 150 ? ? 250 D 800 ? 600 ? 250 7-61 Cost of Income Goods Gross Operating from Sold Profit Expenses Operations $ 300 $500 $ 200 $ 300 750 ? 150 ? 150 0 200 400 100 ? ? ? 250 100 E7-3 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for the 2010 income statement of Lewis Retailers for each of the following independent cases. Sales Beginning Total Ending Case Revenue Inventory Purchases Available Inventory A $ 800 $ 100 $ 700 $ 800 $ 500 B 900 200 700 900 150 C 600 150 300 450 250 D 800 100 ? 600 700 ? 250 7-62 Cost of Income Goods Gross Operating from Sold Profit Expenses Operations $ 300 $500 $ 200 $ 300 750 150 150 0 200 400 100 300 450 ? 350 ? 250 100 E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units. Required: 1. Calculate the number and cost of goods available for sale. Beginning Inventory + Purchase + Purchase Goods Available for Sale 7-63 120 units x $ 8 380 units x $ 9 200 units x $11 700 units $ 960 3,420 2,200 $ 6,580 E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units. Required: 2. Calculate the number of units in ending inventory. Units in Ending Inventory = Units Available – Units Sold Units in Ending Inventory = 700 – 240 = 460 Units 7-64 E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units. Required: 3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. (a) FIFO Goods Available for Sale – Ending Inventory (LIST) (200 × $11) + (260 x $9) Cost of Goods Sold (FIFO) (120 x $8) + (120 × $9) 7-65 $ 6,580 4,540 $ 2,040 E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units. Required: 3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. (b) LIFO Goods Available for Sale – Ending Inventory (FIST) (120 × $8) + (340 x $9) Cost of Goods Sold (LIFO) (200 × $11) + (40 x $9) 7-66 $ 6,580 4,020 $ 2,560 E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units. Required: 3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. Weighted average cost = $6,580 ÷ 700 units = $9.40 per unit (c) Weighted Average Goods Available for Sale – Ending Inventory (460 × $9.40) Cost of Goods Sold (240 × $9.40) 7-67 $ 6,580 4,324 $ 2,256 E7-10 Reporting Inventory at Lower of Cost or Market Peterson Furniture Designs is preparing the annual financial statements dated December 31, 2009. Ending inventory information about the five major items stocked for regular sale follows: Item Alligator Armoires Bear Bureaus Cougar Beds Dingo Cribs Elephant Dressers Quantity on Hand 50 75 10 30 400 Ending Inventory, 2009 Unit Cost When Replacement Cost LCM Acquired (FIFO) (Market) at Year-End Per Item $ 15 $ 12 40 40 50 52 30 30 10 6 Total LCM Required: 1. Complete the final two columns of the table and then compute the amount that should be reported for the 2009 ending inventory using the LCM rule applied to each item. Item Alligator Armoires Bear Bureaus Cougar Beds Dingo Cribs Elephant Dressers 7-68 Quantity 50 75 10 30 400 Total Total Cost × $15 = $ 750 × 40 = $ 3,000 × 50 = $ 500 × 30 = $ 900 × 10 = $ 4,000 $ 9,150 Total Market × $12 = $ 600 × 40 = 3,000 × 52 = 520 × 30 = 900 × 6 = 2,400 $1,750 LCM Per Item $ 12 40 50 30 6 LCM Valuation $ 600 3,000 500 900 2,400 $ 7,400 E7-10 Reporting Inventory at Lower of Cost or Market Peterson Furniture Designs is preparing the annual financial statements dated December 31, 2009. Ending inventory information about the five major items stocked for regular sale follows: Item Alligator Armoires Bear Bureaus Cougar Beds Dingo Cribs Elephant Dressers Quantity on Hand 50 75 10 30 400 Ending Inventory, 2009 Unit Cost When Replacement Cost LCM Acquired (FIFO) (Market) at Year-End Per Item $ 15 $ 12 40 40 50 52 30 30 10 6 Total LCM Required: 2. Prepare the journal entry that Peterson Furniture Designs would record on December 31, 2009. dr Cost of Goods Sold (+E, SE) cr Inventory (-A) 7-69 1,750 1,750 E7-10 Reporting Inventory at Lower of Cost or Market Peterson Furniture Designs is preparing the annual financial statements dated December 31, 2009. Ending inventory information about the five major items stocked for regular sale follows: Quantity Item on Hand Alligator Armoires 50 Bear Bureaus 75 Cougar Beds 10 Dingo Cribs 30 Elephant Dressers 400 Ending Inventory, 2009 Unit Cost When Replacement Cost LCM Acquired (FIFO) (Market) at Year-End Per Item $ 15 $ 12 40 40 50 52 30 30 10 6 Total LCM Required: 3. If the market values recovered by June 30, 2010, to greater than original cost, would the journal entry in requirement 2 be reversed under GAAP? Under IFRS? GAAP does not allow inventory to be written up, even when the circumstances that necessitated the write-down no longer exist. IFRS, on the other hand, does require that a company record a recovery in the inventory’s market value back to its original cost. That is, the previous write-down may be reversed, but only to the point where the ending inventory is reported at the lower of cost or market. 7-70 E7-17 Analyzing and Interpreting the Inventory Turnover Ratio Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions): Required: 1. Calculate to one decimal place the inventory turnover ratio and average days to sell inventory for 2008, 2007, and 2006. Inventory Turnover = Ratio Days to Sell = Cost of Goods Sold Average Inventory 365 Days Inventory Turnover = Ratio *6.8 = $1,502 ÷ $220 7-71 = 2008 2007 2006 6.8* 6.2** 6.0*** times per year 53.7 **6.2 = $1,387 ÷ $224 58.9 60.8 days ***6.0 = $1,297 ÷ $216 E7-17 Analyzing and Interpreting the Inventory Turnover Ratio Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions): Required: 2. Comment on any trends, and compare the effectiveness of inventory managers at Polaris to inventory managers at its main competitor, Arctic Cat, where inventory turns over 4.5 times per year (81.1 days to sell). Both companies use the same inventory costing method (FIFO). The inventory turnover ratio reflects how many times average inventory was made and sold during the year. The inventory turnover ratio for Polaris Industries has increased each year since 2006, leading to a decrease in the average days to sell. This trend suggests that Polaris is selling its inventory more quickly. This is generally considered to be a positive performance. Polaris is performing better than Arctic Cat, where the inventory turnover is 4.5 times per year or every 81.1 days. 7-72 End of Chapter 7