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BUS 4404
Nov 4, 2023
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A)- Inventory turnover indicates how quickly a company's inventory is being sold and replaced. A high turnover suggests efficient inventory management, where products are sold rapidly, reducing carrying costs and the risk of obsolescence. Conversely, a low turnover may signal slow sales or overstocking. (Fernando, 2023) As such it is performed in the following steps: Step 1: First, you determine the Cost of Goods Sold (COGS) . COGS represents the total cost incurred to produce or purchase the goods that were sold during a given period. It includes expenses like raw materials, labor, and manufacturing costs. Step 2: Next, you find the Average Inventory . To calculate this, you add the beginning inventory balance to the ending inventory balance for the period and divide it by 2. This gives you an approximation of the average inventory held during that time. Step 3: Finally, you divide COGS by the Average Inventory: Inventory Turnover = COGS / Average Inventory In terms of its use, companies use inventory turnover to assess their inventory management efficiency. It helps in making decisions about production, purchasing, and pricing strategies. B)- However, receivable turnover, also known as accounts receivable turnover on the other hand measures how quickly a company collects payments from customers. A higher turnover indicates efficient collections and a shorter time to convert credit sales into cash. Conversely, a lower turnover suggests slower collections and potential cash flow issues. (Furhmann, 2021) As such, it is performed using the following steps: Step 1: Calculate Net Sales . Net Sales are the total revenue from sales minus any returns or allowances. Step 2: Find the Average Accounts Receivable . This is the average amount of money owed to the company by its customers during a specific period. It's calculated by adding the beginning accounts receivable balance to the ending accounts receivable balance and dividing it by 2. Step 3: Finally, you divide Net Sales by the Average Accounts Receivable: Receivable Turnover = Net Sales / Average Accounts Receivable In terms of its use, receivable turnover helps companies assess the effectiveness of their credit policies and collection efforts. It guides decisions on credit extension, credit terms, and debt collection strategies.
References: Fernando, J. (2023). Inventory Turnover Ratio: What It Is, How It Works, and Formula . Investopedia. Retrieved from https://www.investopedia.com/terms/i/inventoryturnover.asp Furhmann, R. (2021). Know Accounts Receivable and Inventory Turnover. Investopedia. Retrieved from https://www.investopedia.com/articles/personal-finance/081215/know- accounts-receivable-inventory-turnover.asp
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