Obtain the latest Annual Reports for both Apple and Cisco online. (You can find the latest Annual Reports for both firms, online, at the Investor Relations part of each firm’s website.) Obtain from both company’s financial statements the following amounts for the last two years: inventory; total revenues; and cost of sales. Calculate and apply the inventory turnover ratio and the gross profit percentage calculations that you learned about in this module. Prepare these ratios for both years, and then place the results side-by-side for each company as part of your initial response. Then answer the following questions. For the inventory turnover ratio, what does the difference for that ratio between Apple and Cisco tell you about their inventory management? Was there any trend in this ratio for either Company or for both Companies over the last two years? Was that trend positive or negative? For the gross profit ratio calculations, what do the results for both companies tell you about their overall profitability for the last two years? Was there any trend in this ratio for either Company or for both Companies over the last two years? Was that trend positive or negative?
The inventory turnover ratio measures how efficiently a company manages its inventory. It is calculated as:
Inventory Turnover Ratio=Cost of SalesAverage Inventory
Where:
Cost of Sales is the cost of goods sold during the year.
Average Inventory is the average of the beginning and ending inventory for the year.
For both Apple and Cisco, you would need to find these values for the last two years from their annual reports.
Gross Profit Percentage: The gross profit percentage (or gross profit margin) is a measure of a company’s profitability. It is calculated as:
Gross Profit Percentage=Gross ProfitTotal Revenues×100%
Where:
Gross Profit is calculated as Total Revenues−Cost of Sales.
Now, let’s discuss what the results of these calculations can tell you:
Inventory Turnover Ratio
Difference between Apple and Cisco: If Apple has a higher inventory turnover ratio compared to Cisco, it suggests that Apple is managing its inventory more efficiently, indicating a shorter time for inventory to be sold and replaced. Conversely, if Cisco has a higher ratio, it may indicate that Cisco is taking longer to sell its inventory.
Trends: To assess trends, compare the inventory turnover ratios for both companies over the last two years. An increasing trend in the ratio for either company would indicate improving inventory management, while a decreasing trend might suggest inventory management issues.
Gross Profit Percentage
Overall Profitability: A higher gross profit percentage indicates better profitability because it shows that the company is earning more gross profit for every dollar of revenue after accounting for the cost of goods sold.
Trends: Again, compare the gross profit percentages for both companies over the last two years. An increasing trend would suggest improving profitability, while a decreasing trend might indicate declining profitability.
In conclusion, analyzing the inventory turnover ratio and gross profit percentage for Apple and Cisco can provide insights into their inventory management efficiency and overall profitability. Comparing these ratios over two years can help identify positive or negative trends, allowing you to make informed assessments of each company’s financial performance. However, for accurate and up-to-date results, please refer to the latest annual reports available on the Investor Relations sections of Apple and Cisco’s websites.
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