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Accounting problem with gross profit ratio, the net income and inventory turnover ratio?


two companies in the same line of business have the following items on their financial statements

Company 1 Company 2
Sales $500,000 800,000
costs of goods sold 350,000 500,000
inventory, beginning of year 75,000 60,000
inventory, end of year 25,000 40,000
office rent expense 25,000 10,000


Which of the following statements is correct?

A. company 1 has higher gross profit ratio than company 2
B. company 2 has a lower net income than company 1
C. company 2 sells its inventory faster than company 1
D. company 1 has lower costs of storage and lower investment in inventory than company 2

C. company 2 sells its inventory faster than company 1
Inventory turnover = COGS/Ave. inventory

Company 1
Inventory t/o = 350,000/50,000 = 7 times

Company 2
Inventory t/o = 500,000/50,000 = 10 times

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