After studying this chapter, you should be able to:
Investors need comparable information about inventory when evaluating a retailer's financial statements. To do so, investors need to determine what inventory method a retailer is using (e.g., FIFO, average-cost, or a combination of methods) and then adjust the company's financial information to a common method. That is a good start. What investors often then do is compute relevant information about the company such as inventory turnover, number of days sales in inventory, gross profit rate, and liquidity measures such as the acid-test ratio.
These calculations are critical. Inventory is a significant component of working capital, and the gross profit resulting from sales of inventory is often viewed as the most important income component in measuring a retailer's progress. For example, consider the financial statements ...