Wednesday, December 19, 2012

Important calculation

Inventory t/o

Balance Sheet Line ItemAmount
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 /    -----------------------


$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


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