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Billing statement of account sample for Inventory

hi everyone in this video we're going to learn about some financial statement analysis and specifically how to analyze your inventory all right first up inventory turnover ratio notice the equation down here at the bottom inventory inventory turnover ratio equals the cost of goods sold an income state number statement number divided by average inventory your beginning plus ending balance sheet inventory divided by two okay what does this tell us about a company if we take the cost of goods sold an income statement number and divide it by the average inventory we report on our balance sheet at any given time well it requires you to think about what exactly does cost of goods sold represent cost of goods sold is essentially the summation of all of the inventory that you have sold throughout a given period right so every sale you make you're going to debit cost of goods sold for the value of that inventory and so you might make a sale at the beginning of the period a sale in the middle of the period a few more sales by the end of the period and every time you make those sales cost of goods sold is being debited or going up as a result of making those sales so this is essentially the cumulative total of inventory you've sold during the period average inventory on hand which again for simplicity typically in introductory accounting courses is going to be beginning inventory plus ending inventory divided by two that is essentially telling you what is the typical amount of inventory physically that you have on now this is valuation but still the higher the value the kind of correlates higher the the physical amount and so all we're doing is saying of the typical amount of inventory you have on hand how much do you sell okay now we call this inventory turnover ratio because it's saying how often do you turn your average amount of inventory over right how many times do you take without what i'll generally refer to as what's in the warehouse right now when i say what's in the warehouse i don't mean literally in the warehouse but i mean in the warehouse on the trucks on the sales floors whatever but how often do you take the inventory that you have and turn it into a sale how often do you turn it over all right up here i've got macy's i've got their income statement i've got their balance sheet if i pull their numbers itr equals cost of goods sold right here macy's calls it cost of sales i'm just going to do 2019 here looks like 15 171. if i look at macy's balance sheet i find inventory they call it merchandise inventory i have this year's balance i have last year's balance so i'm going to take this year's balance 5 1 8 8 plus last year's balance five two six three apologize that's a little hard to read and i'm gonna divide those balances by two and put that in parentheses because that's my entire bottom and now all i have to do is a little bit of math right so let's get my calculator went too far with it all right so first i'm going to solve my bottom 5 1 8 8 plus 5 2 6 3 equals divided by 2 there's my average inventory five two two two five now i'm gonna take my top fifteen one seven one divide by my five two two five point five and i'm getting an inventory turnover of two point i'm just gonna round this here 2.9 all right what does that tell me about macy's well that essentially says if you think about macy's they have stores they have warehouses they have trucks they have online shopping whatever right when you think about macy's what it's saying is that the average inventory that they have on hand at any given time across their entire business they end up selling that amount of inventory to customers nearly three times throughout the year when it comes to inventory turnover higher is better right now is this good or bad well it's hard to say because we're not figuring out what macy's turnover was the prior year we're not figuring out what competitors are right we'd have to compare and see how macy's doing relative to itself relative to others but with that said higher is better the more you can turn over your inventory the less risk of obsolescence um the the the less risk of um incurring unnecessary costs related to it so forth and so on okay so 2.9 is basis inventory turnover now that's going to tie directly into our next one days in inventory if turnover is telling us how many times do you sell the average amount of inventory that you hold to investors days in inventory is telling us how long does it take you to do it and for that we're simply going to divide 365 as in 365 days in a year divided by the inventory turnover ratio so for macy's days in inventory equals 365 over we just calculated on the prior slide 2.9 is their inventory turnover ratio get my calculator back out 365 divided by 2.9 and that comes out to i'm going to round this to 126. so what does this tell us about macy's well it says it takes macy's approximately 126 days to cycle all of its inventory to customers then it refills cycles it again refills and nearly cycles it again right almost three cycles and it takes 126 days on average per cycle that's what we learned from this now you have to be cautious in interpretation because i'm talking about this like you fill your warehouse empty it refill the warehouse that's not literally what's happening but conceptually that's what's going on now literally inventory is coming and going constantly but the idea is the average amount you have on hand you turn it over in this case almost three times at a cost of 126 days per time one last thing to note whereas inventory turnover higher is better because inventory turnover is the denominator in this ratio the higher inventory turnover is the lower days in inventory will be so in the case of days in inventory lower is better okay that's it for financial statement analysis of inventory hope you found this helpful and i hope you join me for another video