Problem 5-6A pg. 276 The following information was summarized from the 2007 annu

Question

Problem 5-6A pg. 276
The following information was summarized from the 2007 annual report of Wal-Mart Stores, Inc.

__________________________________________________(In Millions)_______
Cost of sales for the year ended January 31:
2007 $264,152
2006 237,649

Inventories, January 31:
2007 33,685
2006 31,910

The following information was summarized from the 2006 annual report of Target Corporation:

Cost of sales for the year ended:
February 3, 2007 $39,399
January 28, 2006 34,927

Inventory:
February 3, 2007 6,254
January 28, 2006 5,838

Required
1. Calculate the inventory turnover ratios for Wal-Mart for the year ending January 21, 2007, and Target for the year ending February 2007?
2. Which company appears to be performing better? What other information should you consider to determine how these companies are performing in this regard?

Explanation / Answer

1. Calculate the inventory turnover ratios for Wal-Mart for the year ending January 31, 2007, and Target for the year ending February 3, 2007. ITR = Cost of Goods Wal-Mart (2007) in millions Target (2007) in millions Average Inventory Cost of Goods $264,152 Cost of Goods $39,399 Average Inventory $32,797.5 Average Inventory $6,046.0 ITR = 8.1 ITR = 6.5 In fiscal year 2007, Wal-Mart turned over its inventory an average of 8.1 times compared with Target, which turned over its inventory an average of 6.5 times. 2. Which company appears to be performing better? What other information should you consider to determine how these companies are performing in this regard? Wal-Mart is turning over its inventory 1.2 times faster than Target. I think this indicates that Wal-Mart is outperforming Target with respect to inventory management. To really determine which company is performing better, I would want to calculate the Gross Profit Ratio and see the effect of an increase and a decrease in inventory on the Statement of Cash Flows, as well as the effect on the income statement.

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