Good afternoon, Inventory Turnover Computation: Inventory turnover is an important financial criterion for evaluating a company's inventory management effectiveness. You'll need information from your financial statements to calculate it. First, determine the average inventory by averaging the inventory value from the current and prior periods. The amount shown here is an average of all inventories held over the specified time. Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory The average inventory is computed as previously discussed, whereas the cost of goods sold (COGS) can be found in your income statement. An organization may be more efficient if it sells its stock fast, which is indicated by a higher inventory turnover. Inventory Turnover's Significance: Inventory turnover gauges how efficiently a business converts its stock into sales over a predetermined period. It serves as a crucial gauge of a business' operational effectiveness and aids in determining whether inventory levels are adequate. Improved liquidity is often a result of decreased carrying costs and reduced risk of obsolescence, which are both caused by fast inventory turnover. A poor turnover, on the other hand, may indicate inefficiency and result in capital being locked up in unsold items (Team, 2023). Receivable Turnover Computation: Another crucial number, receivable turnover, measures how effectively a business collects unpaid invoices or transactions made with credit. You'll need information from your financial statements to calculate it. The average accounts receivable is first determined by averaging the receivables from the current and prior periods. Receivable Turnover = Net Sales / Average Accounts Receivable The income statement includes net sales; the average accounts receivable is determined as previously described. A company's liquidity is increased if its accounts receivable is collected rapidly, as shown by a higher turnover rate. Receivable Turnover's Significance:
Receivable turnover is a way to figure out how well a business handles its accounts receivable. Faster cash collection because of increased turnover enhances liquidity and lowers the risk of bad debts. A low turnover of receivables, on the other hand, may indicate sluggish collections, thereby straining cash and raising credit risk (Murphy, 2023). Maintaining a balance between providing credit to consumers and guaranteeing timely cash flow is made easier by tracking this measure. References: University of the People: Log in to the site. (n.d.- b). https://my.uopeople.edu/pluginfile.php/1767754/mod_book/chapter/4515 83/WorkingCapMgmt%20Unit%202%20Reading%202%20%281%29.pdf Team, C. (2023). Inventory turnover. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/invent ory-turnover/ Murphy, C. B. (2023). Receivables Turnover Ratio defined: Formula, importance, examples, limitations. Investopedia. https://www.investopedia.com/terms/r/receivableturnoverratio .asp
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