EFFICIENCY RATIOS - created from Mind Map

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INVENTORY TURNOVER=COST OF SALES/AVG INVENTORY

INVENTORY DAYS=AVG INVENTORY/ANNUAL COST OF SALES*365

TRADE RECEIVABLE DAYS = AVG TRADE RECEIVABLE/ANNUAL CREDIT SALES*365

n exam questions you may have to assume that:

(i) year-end receivables are representative of the average figure; and

(ii) all sales are made on credit.

TRADE PAYABLE DAYS= AVG TRADE PAYABLE/ANNUAL PURCHASE*365

In exam questions you may have to assume that:

-Year-end payables are representative of the average figure

-Cost of sales approximates annual credit purchases

-All purchases are made on credit.

SALES TO WORKING CAPITAL=ANNUAL SALES/AVG WC

In exam questions you may have to assume that year-end working capital is representative of the average figure over the year.

This shows how quickly inventory is sold; higher turnover reflects faster-moving inventory.

Inventory days estimates the time taken for inventory to be sold. Everything else being equal a business would prefer lower inventory days

Receivables days estimates the time taken for customers to pay. Everything else being equal a business would prefer lower receivables days.

Payables days estimates the time taken to pay suppliers. A business would prefer to increase its payables days, unless this proves expensive in terms of lost settlement discounts or leads to other problems such as a damaged reputation

In this ratio working capital is defined as the level of investment in inventory and receivables less payables.

The sales to working capital ratio indicates how efficiently working capital is being used to generate sales.