ORIE_350_cash_cycle_notes - ORIE 350 Summary of Lecture...

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ORIE 350 Sept. 7, 2006 Summary of Lecture Notes Cash Cycle The idea is that many firms, particularly merchandising firms such as Sears, for example, purchase items on account, hold the items in inventory, sell them to customers on account, then eventually collect the cash. This can either lead to financing needs or actually serve as a source of cash for growth. A. Inventory Turnover The inventory turnover represents how many times per year the business sells the entire inventory on the shelves and/or in the warehouse. A store does not let the inventory get to zero before restocking ― it is continually replenished. But the concept is the same. Inventory Average Sold Goods of Cost Turnover Inventory = Here the Cost of Goods Sold is an annual amount obtained from the income statement, and the Average Inventory is obtained by averaging the reported inventory over the course of the year (using quarterly data, if available). The resulting figure is the number of inventory turns per year. In the 1950’s, the traditional retails such as the old-line department stores had only 3 or maybe 4 inventory turns per year. Today, Wal-Mart, Target, and the other modern discount retailers aim for 6, 8 or more. A related and useful number is the Days of Inventory on Hand figure, which is found
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ORIE_350_cash_cycle_notes - ORIE 350 Summary of Lecture...

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