TASK: Let's begin by providing explanations for the computations for both inventory turnover and receivable turnover: Inventory Turnover: A financial indicator called inventory turnover is used to evaluate how effectively a company manages its inventory. It is determined by dividing the Cost of Goods Sold (COGS) by the typical value of the inventory for a given time frame. Here is a breakdown based on words: Cost of Goods Sold (COGS): This is the entire expense a business needs to pay to create or acquire the goods it sells over a given period of time, typically a year or a quarter. The average monetary value of the inventory a corporation retains throughout the same time period is known as average inventory value. It is determined by summing the period's beginning and ending inventory values, then dividing the result by two. Let's now talk about what inventory turnover is and how it's used: Meaning: The rate at which a corporation sells and replaces its inventory is known as inventory turnover (Weygandt et al.,1996). A company with a high inventory turnover ratio likely manages its stock effectively because it sells its products rapidly and doesn't hold onto excess inventory. Use: Inventory turnover has the following useful applications: Efficiency Assessment: It aids in assessing the effectiveness of inventory control. Since things aren't left sitting on shelves for long periods of time, a higher turnover lowers the danger of obsolescence or damage. It has an effect on cash flow. High turnover indicates that sales proceeds are regularly received and can be put to other uses. Optimization: It directs choice regarding stock levels. In order to get rid of excess stock, a business may limit orders or run promotions if turnover is too low. They could need to boost orders if it's too high in order to keep up with demand. Let's discuss Receivable Turnover next: Receivable Turnover: Receivable turnover assesses the effectiveness with which a business obtains payments from its clients (Weygandt et al.,1996). It is figured up by dividing Net Sales by the typical Accounts Receivable for a
certain time frame. Net Sales: This is a company's total revenue from selling products or services during a given time period less returns, allowances, and discounts. Average Accounts Receivable: This is the typical sum of money that customers who haven't paid the company yet owe them over the course of a year or a quarter. Meaning: Receivable turnover is a measure of a company's ability to control credit and collect past-due invoices. A low percentage could be an indication of problems with credit policies or late payments, while a high ratio suggests effective collection operations. Use: Receivable turnover benefits companies in a number of ways: It has an impact on cash flow. A larger ratio results in faster cash collection, which can be used for a variety of operational requirements. Evaluation of Credit Policies: It aids in determining the viability of credit policies. If the turnover is too low, it can mean that the business is giving credit to consumers who pose a credit risk. Aging Analysis: It helps to discover consumers who are slow to pay. By looking at the turnover, a business can target its collection efforts at customers that owe money. In conclusion, inventory turnover and receivable turnover are crucial financial indicators that show how well a business operates, manages its cash flow, and makes decisions about its inventory and credit management (Weygandt et al.,1996). Reference: Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). Accounting Principles (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 802. https://en.m.wikipedia.org/wiki/Inventory_turnover
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