Exercise 8-22 Ratio analysis; Home Depot and Lowes [LO8-7] Real World Financials

Question

Exercise 8-22 Ratio analysis; Home Depot and Lowes [LO8-7] Real World Financials The table below contains selected information from recent financial statements of The Home Depot, Inc.,and Lowe's Companies, Inc.. two companies in the home improvement retail industry ($ in millions) Love' s Net sales Cost of goods sold Year-end inventory 1/31/162/1/151/29/16 1/30/1 $79,587 $75,529 $54,192 $51,296 52,197 49,087 32,604 33,369 11,415 10,935 9,202 8,675 Industry Averages: 33 % Gross profit ratio Inventory turnover ratio Average days in inventory 3.9 tiners 94 days

Explanation / Answer

Gross Profit Ratio Choose Numerator / Choose Denominator = Gross Profit Ratio Gross profit / Net sales = Gross Profit Ratio HOME DEPOT 27390 / 79587 = 34.42% LOWE'S 21588 / 54192 = 39.84% Inventory Turnover Ratio Choose Numerator / Choose Denominator = Inventory Turnover Ratio Cost of goods sold / Average inventory = Inventory Turnover Ratio HOME DEPOT 52197 / 11175 = 4.67 LOWE'S 32604 / 8939 = 3.65 Average days in inventory Choose Numerator / Choose Denominator = Average days in inventory Average inventory / Cost of goods sold/365 = Average days in inventory HOME DEPOT 11175 / 52197/365 = 78 LOWE'S 8939 / 32604/365 = 100 OR ALTERNATIVELY Average days in inventory Choose Numerator / Choose Denominator = Average days in inventory Number of days in a year / Inventory turnover ratio = Average days in inventory HOME DEPOT 365 / 4.67 = 78 LOWE'S 365 / 3.65 = 100

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