discussion forum DF-wk2440 PDF

Preview

Summary

Using words, not numbers, explain how an inventory turnover computation is performed, what it means, and what its use is. Please do the same for a receivable turnover computation....

Description

Unit two is devoted to the theme of ‘Estimating Cash Flows’ and we looked at topics such as inventory and receivable turnover calculations, which are measured in rates and days. The cash realization cycle was then identified in conjunction with other forecast models. The uses of current and quick-ratio models of assessment, as well as the time value of money, were investigated. The texts provided sufficiently aid us in assimilating these concepts in the best way possible. We expect to use these concepts and many more in this week's discussion forum to express our opinions through peer dialogue using the guided instructions provided below. Using words, not numbers, explain how an inventory turnover computation is performed, what it means, and what its use is. Please do the same for a receivable turnover computation. Inventory turnover is a financial ratio that indicates how many times a company's inventory is sold and replaced in a given time period. The number of days in the period can then be divided by the inventory turnover formula to determine how long it will take to sell the inventory on hand. To determine how many times inventory is "turned" or sold during a given period, the inventory turnover ratio formula is applied and computed as the cost of goods sold (COGS) divided by the total or average inventory. The ratio can be used to know and control the excess of inventory compared to sales.(CFI, n.d, para1). This ratio is indicative of how well a business converts its inventory into sales. The ratio also shows how well management achieves inventory costs and whether they purchase too much or too little inventory (Furhmann & James, 2021 para1). On the other hand, account receivable turnover is an efficiency ratio or activity ratio that calculates how many times a company's receivables can be converted into cash in a given period (myaccountingcourse.com, 2021 para1). Consider the following scenario: Company A sells mineral water to small quarter-stores. Every month, Business A sends invoices to these retail stores with equal payment terms (net 30). Payment is due 30 days from the date the invoice is issued. Some of these small businesses default payment due date, a few of them respond quickly, and others may simply fold up before the due date without paying business A (Beaver, 2020 para2). This scenario gives a better understanding of how accounts receivable works. To compute account receivables (AR), divide net credit sales by average account receivables. To obtain net credit sales, reduce sales returns and allowances from gross sales (Beaver, 2020 para7). The ratio is used to assess a company's ability to efficiently extend credit to its customers and collect funds from them on time (Beaver, 2020 para1). References Corporate Finance Institute-CFI(n.d)Inventory turnover ratio. https://corporatefinanceinstitute.com/resources/knowledge/finance/inventory-turnover-ratio/ Furhmann R & James M, (2021) how to calculate inventory turnover ratio. https://www.investopedia.com/ask/answers/070914/how-do-i-calculate-inventory-turnoverratio.asp Myaccountingcourse.com(2021) accounts receivable turnover ratio. https://www.myaccountingcourse.com/financial-ratios/accounts-receivable-turnover-ratio

Beaver S (2020).accounts receivable turnover: definition, formula and examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-receivable-turnoverratio.shtml...