Operational Activity Measures

Question 1

What does the “number of days’ supply in inventory ratio” measure? How is it expressed as a formula?

Answer 1

Measures the number of days inventory is held before it is sold or used; indicates the efficient of inventory management. Number of Days Supply in Inventory = 365 (or other days)/Inventory Turnover.

Question 2

What does the “operating cycle length” measure? How is it expressed as a formula?

Answer 2

Measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash is expressed as: Operating Cycle Length = Number of Days’ Sales in Average Receivables + Number of Days’ Supply in Inventory.

Question 3

What does the “inventory turnover ratio” measure? How is it expressed as a formula?

Answer 3

Measures the number of times that inventory is acquired and sold or used during a period; expressed as: Inventory Turnover = Cost of Goods Sold/Average Inventory. Useful in assessing overstocking/understocking of inventory and obsolete inventory.

Question 4

What does the “number of days’ sales in average receivables ratio” measure? How is it expressed as a formula?

Answer 4

Measures the average number of days required to collect receivables; measures the average age of receivables. Number of Days Sales in Average Receivables = 365 (or other days)/Accounts Receivable Turnover.

Question 5

Describe operational activity measures.

Answer 5

Ratios (and other measures) that measures the efficiency with which a firm carries out its operating activities.

Question 6

What does the “accounts receivable turnover ratio” measure? How is it expressed as a formula?

Answer 6

Measures the number of times that accounts receivable turnover (are incurred and collected) during a period; expressed as: Accounts Receivable Turnover = Credit Sales/Average Net Accounts Receivable. Useful in assessing credit policies and collection efficiency.