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Bank Promotion Exams |
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Days' sales in Inventory Ratio The days sales in inventory calculation, also called days inventory outstanding or simply days in inventory, measures the number of days it will take a company to sell all of its inventory. In other words, the days sales in inventory ratio shows how many days a company's current stock of inventory will last. This is an important to creditors and investors for three main reasons. It measures value, liquidity, and cash flows. Both investors and creditors want to know how valuable a company's inventory is. Older, more obsolete inventory is always worth less than current, fresh inventory. The days sales in inventory shows how fast the company is moving its inventory. In other words, it shows how fresh the inventory is. This calculation also shows the liquidity of inventory. Shorter days inventory outstanding means the company can convert its inventory into cash sooner. In other words, the inventory is extremely liquid. Along the same line, more liquid inventory means the company's cash flows will be better. The days sales inventory is calculated by dividing the ending inventory by the cost of goods sold for the period and multiplying it by 365. Formula Days' sales in Inventory Ratio = (Ending Inventory / Cost of Goods Sold) * 365 Example Ambica's Furniture Company's management have been extremely happy with their sales staff because they have been moving more inventory this year than in any previous year. At the end of the year, Ambica's financial statements show an ending inventory of 50,000 and a cost of good sold of 1,50,000. Ambica's days sales in inventory is ...... Days' sales in Inventory Ratio = (Ending Inventory / Cost of Goods Sold) * 365 = (50000/150000) * 365 This means Ambica has enough inventories to last the next 122 days or Ambica will turn his inventory into cash in the next 122 days. ................................ |