Topps Company’s runs two business units, confectionery and entertainment (Edmonds, Olds, McNair, & Tsay, 2010). Their financial situation changed from the year 2004 to the year 2006. Their focus changed In 2006 with 80% of the employees reporting profit and loss to someone compared to 20% reporting before the change and also started performance tracking of their employees (Edmonds, Olds, McNair, & Tsay, 2010). This change put their focus on profitability and employee relations.
Topps Company also made changes In their sports card icensors, now paying dividends, and reduced costs of Bazooka manufacturing (Edmonds, Olds, McNair, & Tsay, 2010). Evaluation of the Topps Company inventory is essential to determine how long products take to sell and what method is used to sell them to increase the company’s net sales. Evaluation of the Topps Company financial status Involves evaluating their inventory turnover ratio and their average days to sell inventory in the year 2006 compared to the year 2005.
To evaluate the number of days it takes the Topps Company to sell inventory, the inventory turnover ratio must first be determined. To etermine the inventory turnover ratio, the cost of goods sold is divided by the amount of Inventory (Edmonds, olds, McNalr, & Tsay, 2010). This determines the number of times the inventory is sold each year (Edmonds, Olds, McNair, & Tsay, 2010). In 2005, the Topps Company had a cost of goods in the amount of $189,200. 00. Their Inventory in 2005 was $32,936. 0 (Edmonds, Olds, McNair, & Tsay, 2010).
Dividing the cost of goods by the Inventory, their turnover ratio in 2005 was 5. 7. In 2006, the Topps Company had a cost of goods in the amount of $198,054. 00. Their inventory in 2006 was $36,781. 0 (Edmonds, Olds, McNair, & Tsay, 2010). Dividing the cost of goods by the inventory, their turnover ratio in 2005 was 5. 4. After the turnover ratio Is determined, the next step Is to determine the average number of days to sell inventory.
This determines how many days the inventory is present in the warehouse (Edmonds, Olds, McNair, & Tsay, 2010). To calculate the number of days in inventory, 365 days for the year is divided by the Inventory turnover ratio (Edmonds, Olds, McNair, & Tsay, 2010). The longer the Inventory stays in the warehouse, the less profitable the company will be. In 2005, the turnover ratio was 5. 7 which would show that the inventory was in the warehouse for 64 days. In 2006, the turnover ratio was 5. which showed the inventory was in the warehouse for 68 days.
The number of days the product Is in Inventory effects the profit the company brings in. The Topps Company kept inventory in their warehouse for 68 days in the 1 inventory is declining. It is taking 4 more days to move inventory in 2006 compared to 2005. Even though the company has made changes in employee relations and profitability, they need to evaluate their inventory management to determine how it an be improved.
Management of inventory to decrease the number of days the product is in the warehouse will increase profitability for the Topps Company. When products are sold, products in the Inventory account are transferred to the Cost of Goods Sold account (Edmonds, Olds, McNair, & Tsay, 2010). There are four different types of cost flow methods that can be used by companies: Specific Identification, First-ln, First Out (FIFO), Last-ln, Last Out (LIFO), and Weighted Average (Edmonds, Olds, McNair, & Tsay, 2010). It appears the Topps Company has used the FIFO method of cost flow.
The FIFO method is the most common method of cost flow and is used a lot for perishable items such as the confectionaries the Topps Company sells. FIFO requires the cost of the items purchased first to be assigned to the cost of goods sold (Edmonds, Olds, McNair, & Tsay, 2010). FIFO usually produces a higher gross margin for a company. The Topps Company wanted a higher gross margin for their company, though this caused a higher cost of goods and a higher amount of inventory kept on stock for a longer period of time.
Their focus was on profitability and employee relations when t should have been on moving inventory at a higher rate for profit. In the year 2006, their products took 4 more days to sell than they did in the year 2005. Using the FIFO cost method, they were able to produce a higher gross margin for the company but their net sales decreased from $294,231. 00 in the year 2005 to $293,838. 00 in the year 2006 and their products stayed on the shelves longer (Edmonds, Olds, McNair, & -rsay, 2010).