Understanding Real World Financial Reports Essay

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Understanding Real World Financial Reports
Becky L. Campbell
ACC 281
LaKeitha Givens
August 1, 2011

Understanding Real World Financial Reports
    Use the Topps Company’s annual report in Appendix B to answer the following questions.
a. What was Topps’ inventory turnover ratio and average days to sell inventory for 2006 and 2005?
b. Is the company’s management of inventory getting better or worse?
c. What cost flow method(s) did Topps use to account for inventory?
    According to Appendix B, the cost of sales for Topps was $198,054 in 2006 and $189,200 in 2005. The total inventory was $36,781 in 2006 and $32,936 in 2005. To determine the inventory turnover ratio we need to divide cost of sales by inventory. For 2006 this would be $198,054/$36,781. For 2005 this would be $189,200/$32,936. After making all the calculations, the inventory turnover ratio for 2006 is determined to be 5.38. The inventory turnover ratio for 2005 is determined to be 5.74. After calculating the inventory ratio we can go on to figure out how many days the company had to sell inventory. The equation for this is to divide 365 by the turnover ratio for each year. After making those calculations we can see that the average days to sell inventory is about 68 (67.84) days in 2006, and about 64 (63.59) in 2005.
    After looking performing the calculations, and reviewing Appendix B, it is clear that Topps’ management of inventory seems to be getting a little worse. If you take a look at the number of days it took to sell inventory in 2005 (64) and in 2006 (68) you can see that it took them about 4 days more to sell inventory in 2006 than it did in 2005. This is a good indication that Topps’ management of inventory needs to be improved.
    The cost flow methods that Topps’ used to account for inventory are FIFO (first in, first out). The big reason Topps uses this method is because they deal with confectionaries (gum, candy, etc.) It only makes sense for them to use the...

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