B-08.

11

Bell Computers assembles and sells notebook computers. The company is attempting to better manage
cash flow and reduce inventory. The most recent strategy has been to require major vendors to
establish warehouses adjacent to Bell's factory locations. Bell then buys components from vendors as
needed for same day delivery.

During 20X2, Bell had beginning inventory of $23,000,000 and cost of goods sold of $168,000,000.
Inventory at the end of 20X2 was $33,000,000. During 20X3, cost of goods sold was $440,000,000.
Inventory at the end of 20X3 was $55,000,000.

(a) What is the relationship between cash flow and inventory?

(b) One of Bell's product managers was very disappointed with the continuing increase in inventory
from the beginning of 20X2 through the end of 20X3. He felt his directives to better manage
inventory were not being followed. Prepare an inventory turnover ratio analysis for 20X2 and
20X3. Based on your analysis, is the company better managing inventory levels? How is it
possible that the ratios are improving at the same time that inventory levels are expanding?
Name:
B-08.11
Date: Section:

(a) Inversely proportional. As cash flow increases, the inventory decreases. Same way as inventory increases,
cash flow decreases.

(b) 20X2 Inventory Turnover Ratio

=6

20X3 Inventory Turnover Ratio

= 10
Name:
B-08.11
Date: Section:

Inventory
Turnover Inventiry
Beg. Inventory Ending InventoryAve Inventory COGS Ratio turnover
### 33,000,000.00 28,000,000.00 ### 6 60.83

### 55,000,000.00 44,000,000.00 ### 10 36.50