Understanding Financial Ratios and Company Performance
How often did Polk Software Inc. sell and replace its inventory over the past year?
a. 2.86 x.
b. 4.57 x.
c. 5.03 x.
d. 8.01 x.
Based on the inventory turnover ratio in the software industry, which statement is true for Polk Software Inc.?
A. Polk Software Inc. is holding more inventory per dollar of sales compared to the industry average.
B. Polk Software Inc. is holding less inventory per dollar of sales compared to the industry average.
Answer:
Polk Software Inc. sold and replaced its inventory 4.57 times over the past year. This means that the company turns over its inventory approximately every 4.57 times within the year. Based on the industry inventory turnover ratio of 3.89x, the true statement for Polk Software Inc. is that it is holding less inventory per dollar of sales compared to the industry average.
Explanation:
Data and Calculations:
Quick ratio = 2.00x
Cash = $32,850
Accounts receivable = $18,250
Current assets = $73,000
Inventory = $21,900 ($73,000 - $32,850 + $18,250)
Current liabilities = $25,550
Cost of goods sold = $100,000
Polk Software Inc.
The inventory turnover ratio = Cost of goods sold / Average Inventory = $100,000 / $21,900 = 4.57x
Industry Ratio Comparison:
The industry average inventory turnover ratio is 3.89x.
Comparing with this industry benchmark, Polk Software Inc. is holding less inventory per dollar of sales, indicating a more efficient management of inventory compared to the industry average.