Hey guys, please look at the questions 2 and 3. They have beginning and ending inventory, COGS. However, in the book calculation, inventory turnover has only ending inventory instead of using the average inventory in the denominator. The amount of purchase in payable turnover is calculated by adding COGS to ending inventory rather the difference in inventory balance. They got wrong or i am?
Hello, yes, they are using the ending inventory. The ratios are just looking at specific points in time. You can’t judge anything solely on the basis of the ratio. You must compare it with some benchmark which can be either the ratios of peer companies, the industry or the historical values of the company itself. In case of payables turnover you calculate purchases as: Purchases = Ending inventory - Beginning inventory + Cost of goods sold which is I think clear. Purchases are simply indicated over time, it is impossible (or makes no sense) to calculate purchases at a point in time. Is that what you wanted to know?
Thank mihau10, i just want to make sure that the calculation in the CFA text book is wrong. I got your point but in my opinion, they should use the average of balance sheet item (inventory in this case) when calculating a ratio which has a income statement item (credit sale).
Hey yea I noticed that too. I thought the denominator was the average value and got that question wrong. I’ve been taught to use the average balance in acc courses…but who knows. I guess you can email the CFA Institute and see what they figure is the reasoning or if in fact it is an error. Worth the try.