Download Slides MS PowerPoint

Introduction to Accounting
Preparing for a User’s Perspective
Compute and understand the
Inventory Turnover ratio
By Kevin C. Kimball, CPA
with support from
Debits and Credits Trainer
www.canvas.net
Free Jan. 2014
Available on the
Google Play Store
Inventory turnover ratio indicates how:
How can we get
this inventory sold
more quickly?
Effective
Let’s buy $70 K
of inventory.
Purchase from suppliers
Inventory
Sell to customers
Cost of Goods Sold
Management
Efficient
10 days 20 days
30 days
60 days
Go sour.
Ughhh!
Pet rock
Go out of style
Become
Obsolete
If you hold Inventory too long it can:
Oversupply
Christmas Day (December 25th)
December 24th $50 each
December 26th FREE,
Please recycle
24 times per year
Low gross margins
4 times per year
High gross margins
Raw
materials
Work-inprocess
Finished
goods
$100
Inventory purchase
Day 1
$100
Inventory sale – Cost of Goods Sold
< ---------- Within One Month ----------- >
If sell average inventory
balance every month,
Day 30
inventory will “turnover”
about 12 times per year
If we stop buying today, how long is it
going to take us to get rid of this stuff?
Yellow Banana Co.
Inventory turnover = 60
$0 cash inflow?
= sell in 6.08 days
(365 days / 60 Inv turnover)
Sell before turn brown
Sell at full price $.50 lb
Lower inventory carrying costs
Increase liquidity
Brown Banana Co.
Inventory turnover = 5
= sell in 73 days
(365 days / 5 Inv turnover)
Bought too much and it spoiled
Became obsolete before they
could be sold.
Why?
We aren’t managing our
inventory and sales very
well.
Bad marketing campaign
Radioactive
bananas
Too short?
Hmmm. I guess I will go
somewhere else
Why?
Customer
Stock out
We might not have
enough inventory to
support our sales.
= stock outs
I think if your shelves didn’t look so
empty, I would buy more.
Inventory reorder point
Psychic stock
Cycle stock
Just to be safe, I’ll ask my
elves to build another
50 M girls bikes.
Safety stock
Why would we buy
more inventory than
we need?
Cycle stock
Safety stock
Now why do we want
more inventory?
Psychic stock
Missed sales
Inventory Turnover
Cost of Goods sold
Inventory Turnover =
Average Inventory
Average
Inventory
Beg. Inv. + End. Inv.
=
2
Inventory Turnover
Cost of Goods Sold $1,000
Inventory Turnover 5 =
Average Inventory $200
Beg. Inv $170 + End. Inv $230
Average Inventory $200
=
2
Days Sales of Inventory, Average Days to Sell
365
Days Sales of Inventory =
73 days
365 days per year
Inventory Turnover Ratio of 5
Company’s average days of inventory
Industry’s average days of inventory
$200 COGS
$200 Inventory purchase
Day 1
Day 20
$200 COGS
Day 73
Inventory Turnover Ratio
Days Sales of Inventory
=
Cost of Goods Sold
365 days per year
Average Inventory
Inventory Turnover Ratio
If you know 3 out of the four variables, you can solve for the fourth variable.
Inventory Turnover Ratio 13.03
=
=
Cost of Goods Sold $40 M
Average Inv. ?????
Days Sales of Inventory 28.01 days
$3.07 M
365 days per year
Inv. Turnover Ratio
13.03
Inventory Turnover Ratio
Year X1
30.12
Year X2
27.39
Year X3
22.87
Year X4
18.41
Year X5
13.72
Year X6
13.03
Days Sales of Inventory
Year X1
12.12
Year X2
15.96
Year X3
15.96
Year X4
19.83
Year X5
26.60
Year X6
28.01
Yellow Banana Co.
Inventory turnover = 60
= sell in 6.08 days
(365 days / 60 Inv. turnover)
Banana Industry
Inventory turnover = 84.89
= sell in 4.3 days
(365 days / 84.89 Inv. turnover)
Summary
• Be able to define and compute:
– Inventory turnover ratio and days sales of
inventory
• Use the two ratios to assess management as
compared to:
– its own past
– its industry
Introduction to Accounting
Preparing for a User’s Perspective
Compute and understand the
Inventory Turnover ratio
By Kevin C. Kimball, CPA
with support from
Debits and Credits Trainer
www.canvas.net
Free Jan. 2014
Available on the
Google Play Store