## Wednesday, December 19, 2012

### Important calculation

Inventory t/o

 Balance Sheet Line Item Amount Cost of goods sold \$4,075,000 Direct materials expense \$1,550,000 Raw materials inventory \$388,000 Total inventory \$815,000

To calculate total inventory turnover, the accounting staff creates the following calculation:

\$4,075,000 Cost of Goods Sold
--------------------------------------   =   5 Turns Per Year
\$815,000 Inventory

To determine the number of days of inventory on hand, they divide the number of turns per year into 365 days, as follows:

Cost of Goods Sold
365 /    -----------------------
Inventory

=

\$4,075,000 Cost of Goods
365 / ---------------------------------
\$815,000 Inventory

= 73 Days of inventory

CCC=# days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.
=Inventory conversion period  +Receivables conversion period  –Payables conversion period
=Avg. Inventory

COGS / 365
+Avg. Accounts Receivable

Credit Sales / 365
–Avg. Accounts Payable

Purchases / 365