Explanation

To calculate inventory turnover based on average inventory, we use the formula:

Inventory Turnover = Cost of Sales / Average Inventory

Step 1: Determine the appropriate inventory values

The problem states that "Changes to the allowance for inventory obsolescence have already been reflected in cost of sales." This means the inventory values given are at cost, and any write-downs have already been included in cost of sales. Therefore, we should use the cost of inventory values for our calculation.

From the table:

• Year 2 Cost of Inventory = $225,000
• Year 1 Cost of Inventory = $375,000

Step 2: Calculate average inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Since Year 1 is the beginning of Year 2:

• Beginning Inventory (Year 2) = Year 1 Cost of Inventory = $375,000
• Ending Inventory (Year 2) = Year 2 Cost of Inventory = $225,000

Average Inventory = ($375,000 + $225,000) / 2 = $600,000 / 2 = $300,000

Step 3: Calculate inventory turnover

Cost of Sales for Year 2 = $1,250,000

Inventory Turnover = $1,250,000 / $300,000 = 4.1667 ≈ 4.2

Step 4: Verify the answer

The calculated value of 4.1667 is closest to 4.2 among the options provided.

Key Points:

1. We use cost of inventory values, not net realizable values, because the allowance adjustments are already reflected in cost of sales.
2. Inventory turnover measures how efficiently inventory is managed - higher turnover generally indicates better inventory management.
3. The formula uses average inventory to smooth out seasonal fluctuations.

Why not use net realizable value? Net realizable value (NRV) is the estimated selling price minus costs of completion and disposal. Since the allowance for obsolescence adjustments are already in cost of sales, we should use the cost values for consistency with the cost of sales figure.