j times per ye 1r on 11 erage said differe ntl y the S l pia it em s it s in

J times per ye 1r on 11 erage said differe ntl y the

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j times per ye; 1r on ; 11 ·erage; said differe ntl y, the S l' pi~a/ it em s it s in inventor y about 72 days before being so ld (365 day s/.'l .2 tun es = 7 1.6 davs). Seve ~al alterniltive defini tio ns of the inven tory turn ove r rat io ex ist, i n- cluding sales di, ·id ed by e ndin g inve ntory and cost of goods sold di, ·id ed by ,wer age inv e ntor y. Cost of goo ds so ld is a mo re app r opriat e numerator th an sales b ec au se s ale s include a profit markup that is absent from in- ventor y. But b ey ond this, I sec littl e to choose from amo ng the va r io us de fi nitions. The Co ll ect io11 P er i od Th e co llecti o11 period hig hlig ht s a co mpany 's man age men t of accounts re- ceivable. For Am etek, . . .-\ccounts receivable $18 1. 0 Co ll ect,on penod = C r 1 1 = $l 019 31365 == 6 -f .8 davs r e< 1 t ~a e~ pc r ( a y , . . > Credit sales appear he re r at her than net sales b ec au se only credit sales generate accounts r ece ivable. As ;1 compa ny o ut side r, h oweve r, 1 do n ot know what po rtion of Amer ek\ n et sa les, if an y, ar e fo r cash, so I assu me they are a ll on cr edit . Cred it sal e~ per d:1y is defined as cr ed it sal es for the accounting per i od divided by rhe number of day s in the .icco un ring pe- riod, which fo r il nnual s tat em en ts is o))l'iously 365 days. Tivo interpr e tat i ons of Am etek s co ll e ctio n period are possible. \Ve can say that Ametek has an avera ge of 6-f.8 days' worr h of credit sales tied up 1 11 accou nt s receivable, or we c an sa_r rl rn t the average time l ag bet wee n sa le and recei pt of cash from the sale i~ 6-f.8 days. _If we lik e, we can define a simpler a~sl:r t111·11~we r ratio for a cc ounts re - ce1vabl~ as just credit sa l es/acc oun ts rec eivable. However, the co ll ectio n per,~d format is more in formative, b ec ause it a ll ows us to compare a co m- panys collec t1o n per i od with its te rm .-, of s:ilc. T hu s, if Ametek se ll s 0 11 90- day «nns,, co ll cc ci on pe,·i od of M.8 d, ., ,, is C>c, 11 , n,, b o, if u, , "' "" of s.ile were 30 days, our interpretation ll'O u)d lie quite differe nt . Dfl ys' S al es in Cash Ainc:tek s • . I . · . la y.-, sa es 111 ca sh 1s as fo ll(rn s: Da ys · sales '= .9! sh < 111d securities _ $22.J in cash Sa les p er da_v - ~ = 8.0 days a 11111 Chapter 2 Emh1111i11g F111111 mn l Pl'ljo n11n11 rr 39 Beware of Seasonal Companies Interpreting many rati os of c om panies wit h season al sa le s can be tr ick y. For example, suppose a com pa ny 's sal es peak sharp ly at Chris tm as, resulting in high year-end ac- counts r ec eivable. A naive collecti on period calculated by relating year-end accounts receivable to average daily s al es for the whole year will produce an apparen tly very high collecuon period beca us e th e denominator is insensitive to the seasonal sales peak. To avoid be i ng misl ed, a better way to calculate the collection period for a sea- sonal company is to use cr edit sales per day based only on the prior 60 to 90 day s' sales.
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