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The inventory days tell us the number of days it took for inventory to sell, right? For example, if inventory arrived in the warehouse on 9th Dec and was totally sold on 12 th Dec, then inventory days would be 3 days, have I got this right?
Lets suppose that inventory days increased from 28 days in 20X8 to 90 days in 20X9. This means that inventory is staying in warehouse storage for longer period of time than it was staying in 20X8. So inventory is slow moving in 20X9. Therefore, there is a possibility that its realizable value may fall significantly due to lesser demand and longer storage. It may also get expired or damaged due to its nature… (like maybe poultry related goods, eggs, etc.)Have i got this right? I know it is very basic but i want to be sure.
Yes you have – if you remember this ratio by its correct name “inventory holding period” (this is how the examiner would like you to refer to it) it is the average period for which inventory is held (in days). This could be for a good business reason – e.g. deliberate increase in stock-holding of finished goods in anticipation of an increase in demand – or raw materials, in anticipation of a shortfall in supply.
Or it could be risks associated with over-stocking – slow-moving/technically obsolete/out-of-fashion/perished, etc.
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