Question

E6-11 Suppose this information is available for PepsiCo, Inc. for 2015, 2016, and 2017. (in millions) 2015 2016 2017 Beginning inventory $ 1,926 $ 2,290 $ 2,522 Ending inventory 2,290 2,522 2,618 Cost of goods sold 18,038 20,351 20,099 Sales revenue 39,474 43,251 43,232 Instructions (a) Calculate the inventory turnover for 2015, 2016, and 2017. (Round to one decimal place.) (b) Calculate the days in inventory for 2015, 2016, and 2017. (c) Calculate the gross profi t rate for 2015, 2016, and 2017. (d) Comment on any trends observed in your answers to parts (a), (b), and (c)

Answer 1

Answer:

PepsiCo, Inc.

a) Computation of the Inventory Turnover:

= Cost of goods sold/Average Inventory

(in millions)                     2015                      2016                      2017

= Cost of goods sold    18,038                     20,351               20,099

/ Average Inventory     $2,108                    $2,406               $2,570

=                                   8.6 times                8.5 times             7.8 times

b) computation of the days in inventory:

= Days in the period/Inventory Turnover Ratio

(in millions)                     2015                      2016                      2017

= Days in the period       365                       365                       365

/ Inventory Turnover Ratio 8.6 times               8.5 times              7.8 times

=                                       42 days                43 days                  47 days

c) Computation of the Gross profit rate:

= Gross profit/Sales * 100

(in millions)                     2015                      2016                      2017

Gross profit               $21,436               $22,900                 $23,142

/ Sales  Revenue        39,474                   43,251                  43,232

=                                  54.3%                     52.9%                     53.5%

d) PepsiCo's inventory turnover reduced marginally from 2015 to 2017.  The days in inventory fluctuated unsteadily just like the gross profit rate in the three years under review.

Explanation:

a) Data and Calculations:

(in millions)                     2015            2016             2017

Beginning inventory  $ 1,926        $ 2,290        $ 2,522

Ending inventory         2,290            2,522            2,618

Total Inventory             4,216              4,812            5,140

Average Inventory    $2,108           $2,406         $2,570

Sales revenue           39,474           43,251         43,232

Cost of goods sold    18,038           20,351         20,099

Gross profit             $21,436        $22,900        $23,142

PepsiCo's inventory turnover is a ratio that shows the frequency at which the company sells and replenishes its goods during an accounting period.   It is calculated as the cost of goods sold divided by the average inventory.

PepsiCo's days in inventory indicates the number of days the company takes to sell its inventory.  It is calculated as the number of days in the period, e.g. 365 days, divided by the inventory turnover ratio.

The Gross profit rate shows the relationship between the gross profit and the sales revenue.  It is the percentage of sales revenue that covers the business expenses and from which net income is derived.