Financial Performance Measurement – Liquidity Measures – ACCA Management Accounting (MA)
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when calculating the average payment period, here in example 1, we take trade payables that are at the end of the year. and as you said for calculation of average collection period, isn’t taking trade payables at the end of the year for the calculation of average payment period also misleading? shouldn’t we take average trade payables?
That is true, but we have to do the best we can with the information available.
you said in the lecture that the cost of sales given in example 1 is not the cost of purchases because there can be other costs involved. could you please give any examples of such costs? and shouldn’t all purchase costs be involved in the income statement so that we can calculate the correct profit?
Two reasons. Firstly the cost of sales takes into account the opening and closing inventories as well as the purchases.
Secondly, if they produce the goods themselves then the cost of sales will include the labour and other factory costs.
Hi John! I can’t understand why do we not panic even if the quick ratio comes out to be slightly lower than 1?Having it lower than 1 means we won’t have enough cash and cash receivables to pay our current liabilities, so how are we gonna pay them?
Although we would worry, we do still have inventory (which is not counted in the quick ratio) and some of the inventory will hopefully be sold in time to provide more cash.
Sir please can we also assume the cost of sales to be purchases in calculating for inventory days incase we aren’t given cost of sales in the question
Yes you can 🙂
Greetings sir.
I did not understand why COS instead of Purchases should be used for the working of Inventory days. Please do elaborate.
Also, what is the difference in purpose between gearing and interest cover ratio – in both it seems we are just trying to figure out the ability of the profit to pay over the interest expense.
I say in the lecture that if we know the purchases then we would use them. If we don’t then we haven’t much choice but ti use cost of sales.
The basic purpose of the gearing ratio and the interest cover is the same.
Sir, you have specifically mentioned in the Notes that to calculate Inventory days, to use COS in the formula. Inventort/COS x 365.
To calculate Payable, to divide by Purchases x 365. Pg110.
My question is on Inventory days, not Payables. Why COS & not Purchases ? Please elaborate.
Because inventory is valued at the total cost of production, not just on materials cost.
For calculating Payable days, why haven’t we calculated it on Purchases as we can find out the purchases since we have been given the opening inventory(which is the closing inventory of 2006) and the closing inventory of 2007?
I do mention in the lecture that it would be better to use purchases. However although we can get the figure for 2007, we cannot get it for 2006 on the information given. If we want to be able to compare we need to compare like with like.
Ah yeah! Silly me. Thank you.
No problem, and you are welcome 🙂
There are two accepted way of measuring gearing – either debt/(debt + equity) or debt/equity.
Obviously they give different figures, and if a figure is required in the exam, the question will specify how it is to be measures.
However, what matters with gearing is whether it is increasing or decreasing, and either of the two measures will result in the same conclusion.
Hello Sir. In FA material, Gearing calculates as Long-term debt/(Equity+Long-term debt). Why such inconsistency? Thank you
In the inventory days ratio, why closing inventory was used instead of average inventory?