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j times per ye;1r on ;11·erage; said differently, the Sl'pi~a/ item sits in inventory about 72 days before being sold (365 days/.'l.2 tunes = 71.6 davs). Seve~al alterniltive definitions of the inventory turnover ratio exist, in-cluding sales di,·ided by ending inventory and cost of goods sold di,·ided by ,werage inventory. Cost of goods sold is a more appropriate numerator than sales because sales include a profit markup that is absent from in-ventory. But beyond this, I sec little to choose from among the various definitions. The Collectio11 Period The collectio11 period hig hlights a company's managemen t of accounts re-ceivable. For Ametek, . . .-\ccounts receivable $181.0 Collect,on penod = C r 1 1 = $l 019 31365 == 6-f.8 davs re< 1 t ~a e~ pc r ( a y , . . > • Credit sales appear here rather than net sales because only credit sales generate accounts receivable. As ;1 company outsider, however, 1 do not know what portion of Amerek\ net sales, if any, are for cash, so I assume they are all on credit. Credit sale~ per d:1y is defined as credit sales for the accounting period divided by rhe number of days in the .iccounring pe-riod, which for ilnnual statements is o))l'iously 365 days. Tivo interpretations of Ametek s collection period are possible. \Ve can say that Ametek has an average of 6-f.8 days' worrh of credit sales tied up 111 accounts receivable, or we can sa_r rlrnt the average time lag between sale and receipt of cash from the sale i~ 6-f.8 days. _If we like, we can define a simpler a~sl:r t111·11~wer ratio for accounts re-ce1vabl~ as just credit sales/accounts receivable. However, the collection per,~d format is more informative, because it allows us to compare a com-panys collect1on period with its term.-, of s:ilc. Thus, if Ametek sells 011 90-day «nns,, collcccion pe,·iod of M.8 d,.,,, is C>c,11, n,, bo, if u,, "'"" of s.ile were 30 days, our interpretation ll'Ou)d lie quite different. Dflys' Sales in Cash Ainc:teks I· • . I . · . lay.-, sa es 111 cash 1s as foll(rn s: Days· sales'= .9!sh <111d securities _ $22.J in cash Sales per da_v -~ = 8.0 days a 11111 Chapter 2 Emh1111i11g F111111mnl Pl'ljon11n11rr 39 Beware of Seasonal Companies Interpreting many ratios of companies with seasonal sales can be tricky. For example, suppose a company's sales peak sharply at Christmas, resulting in high year-end ac-counts receivable. A naive collection period calculated by relating year-end accounts receivable to average daily sales for the whole year will produce an apparently very high collecuon period because the denominator is insensitive to the seasonal sales peak. To avoid being misled, a better way to calculate the collection period for a sea-sonal company is to use credit sales per day based only on the prior 60 to 90 days' sales.