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·
• .
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.
