Inquiry about DOH, Turn over Ratio and FSN Analysis if Inventory on hand = zero

CFA Level I FRA
#1

Hello Guys

Just need to ask a question regarding the calculation of TurnOver Ratio and DOH for quarter (90 days) also I used the turnover ratio to determine if this item is Fast, Slow or Non moving item

If I have a beginning stock of $1,000 and the closing stock is Zero and the COGS is $1,000, this means that I sold all stock in the calculating period.

I used this formula for DOH = Inventory on Hand / Average Usage and for Turns = 90 / DOH

The issue is; when I’m using this formula, the DOH = 0 and turn = error, then I cannot determine if this item is fast, slow or non but it supposed to be FAST item

I do appreciate your advise in this.

#2

Seems like your formulas are a bit off. Try these.

Inventory turnover = COGS / Average Inventory

DOH = 90 * 1/Inventory turnover (90 because it is for a quarter)

I think this should fix it, but if it doesn’t let me know.

#3

Thanks Conor

If I used your formulas, the result will be as follows;
Turns = 1,000/((1,000+0)/2) = 2
DOH = 90*1/2 = 45 days

How the DOH is 45 days and I have already no stock in my warehouse (as the closing inventory is zero) ??

#4

So we have beginning stock of 1,000 and ending stock of 0 so that makes average inventory during the period 500.

Based on our COGS, we sell this amount twice during the period (turnover our average inventory twice (1000/500=2))

So using the ratios we assume that on average in a quarter we turnover inventory twice, meaning it takes us 1/2 of a quarter to sell the average amount of inventory we have on hand. 1/2*90 = 45

Does that make sense?

#5

Thanks Connor, It makes sense, but I have another inquiry about my used formula and yours

The inventory I dealt with is not sold inventory, my case that I have two areas, One is the main warehouses and the other is the Area stores, I issue the items from main W/H to area stores and area stores sell it, therefore I used the COGS/Avg. Inv. in Area stores and Inv. on hand/Avg. usage in main warehouses.

Returning to my example; the $1,000 is the value of the Issued QTY. to from main W/H to area store and I don’t know this to be considered as a COGS or not?

#6

Hmm good question. This might be a bit further than my knowledge in accounting goes. But I’ll give it a go.

If you still own the inventory once it’s moved to the area stores (your firm still has all the risks and reward of ownership) then no this wouldn’t be COGS in an accounting sense.

If the area stores are buying the inventory from your firm then it would be COGS but it sounds like they are not.

It sounds like you would be much better suited to use an internal inventory management metric in this case in my opinion.

#7

Area stores not buying the stock from main warehouses, it likes a transition stage but you have to manage the inventory in all areas, because as you said, the firm is still having the risk, and sometimes the area stores request over his needs.

Do you have any suggestion how can I manage the inventory days, turn over, and how can i define the FSN items in MAIN WAREHOUSE.

Thanks again.

#8

I unfortunately do not, my strengths lie in the financial statement analysis, not preparation.

I think contacting CPA or your country’s equivalent is the next step I would recommend