Topps, a company who specializes in confectionery and entertainment, has just closed out their fiscal year and has calculated their inventory and expenditures. Their goal for 2006 was to restructure the business to drive operating profitability. In this paper, the discussion will concentrate on inventory turnover ratio, how well inventory is managed, and which method was used to account for their inventory.
These facts and figures will be gathered from the company's Consolidated Statements of Operations report.In order for one to completely understand what inventory turnover ratio is, it is important to define it. Inventory turnover ratio is the cost of goods sold divided by inventory (Edmonds, et al. , 2007).
It measures the amount of times a company sells its inventory throughout their fiscal year. The higher this number is, the better off the company is. In 2006, Topps company had a turnover ratio of 5. 38, compared to 5.
74 in 2005. These figures show that Topps had a better year in 2005.To take an analysis a step further, a company such as Topps will use these ratios to determine the average number of days it took to sell their inventory. The average days in inventory is calculated by dividing 365 by the inventory turnover (Edmonds, et al. , 2007).
Using the above turnover ratios, Topps' average days in inventory for 2006 was 68 days, and 64 days in 2005. According to these figures, it shows that in 2006 it took Topps Company four days longer to sell their product than in 2005.This is an indication that the management of inventory is getting worse. To get these calculations, Topps uses the First-in, First-out (FIFO) method. This method “treats the first items purchased as the first items sold for the purpose of computing cost of goods sold” (Edmonds, et al. , 2007, p.
126). Dealing with perishable products, it is important for Topps to sell its older product first, otherwise, they are just defeating their main purpose, which is to make a profit.
