Sec 1 - Operational Ratios

Question 1

Operational Activity Ratios

Answer 1

• These measure the efficiency with which a firm carries out its operating activities.

Question 2

Accounts Receivable Turnover =

Answer 2

• Accounts Receivable Turnover =
• (Net) Credit Sales / Average (Net) Accounts Receivable (e.g. (Beginning + Ending)/2)
• Measures the number of times that accounts receivable turnover (are incurred and collected) during a period.
• Indicates the *quality of credit policies (and the resulting receivables) and the efficiency of collection procedures.*

Question 3

Number of Days’ Sales in Average Receivables =

Answer 3

• Number of Days’ Sales in Average Receivables =
• (300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above)
• Measures the average number of days required to collect receivables; it is a measure of the average age or receivables.

Question 4

Inventory Turnover =

Answer 4

• Inventory Turnover =
• Cost of Goods Sold / Average Inventory (e.g. (Beginning + Ending)/2)
• Measures the number of times that inventory turns over (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory.

Question 5

Number of Days’ Supply in Inventory =

Answer 5

• Number of Days’ Supply in Inventory =
• (300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed above)
• Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management.

Question 6

Operating Number of Cycle =

Answer 6

• Operating Number of Cycle =
• Days in Operating =
• Number of Days’ Sale in A/R + Length Cycle Number of Days’ Supply in Inventory
• 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_.