From the course: Financial Accounting Part 2
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Days sales in inventory
From the course: Financial Accounting Part 2
Days sales in inventory
- An analysis of a company's operating cycle consists of looking at three ratios, days' sales in inventory, average collection period, and days' purchases in payables. Days' sales in inventory tells me how long, on average, does my inventory stay with me until it's sold? The average collection period tells me, on average, how long from when I sell something on credit until I collect the cash and days' purchases in payables tells me how long on average I take to pay my vendors. Now, the first two taken together, days' sales in inventory and average collection period indicate what we call the company's operating cycle. The third ratio, days' purchases in payables, is then subtracted from our operating cycle to determine if we have a financing gap or not. So let's first look at inventory turnover. We buy inventory, and the question is, how long until we sell that inventory. Can we calculate on average how long our inventory sits in…
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