The following data have been extracted from the financial statements of a firm for two years, 1993 and 1994:
1993 1994
Assets 10,895 12,444 -
Sales 8,465 9,275
Inventory 3,126 3,549
COGS 7,120 7,387 -
The average inventory processing period for 1994 equals ________.
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A. B. C. D.Explanation
This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods- sold. COGS is preferable since it does not include the profit margins involved in net sales.
Therefore, two relevant ratios are:
a. Inventory turnover ratio = COGS/average inventory.
b. Average inventory processing period = 365/inventory turnover.
Typically, average inventory for a given year is taken to be the average of the ending values of the inventory for this year and the last year. For 1994, the average inventory equals (3549+3126)/2 = 3,338. Inventory turnover ratio = 7,387/3,338 = 2.21. Average inventory processing period = 365/2.21 = 164.9 days.