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1)Why dividing receivable days by 360 and multiplying to Sales p.a=average receivables?
I am using the formula but its hard to understand.
2) Why when calculating Average Payables and inventory we using Cost of Sales in both.
In the formula of Payables Days= Payables/Purchases
No?
And in formula of Inventory inventory/Cos. Here is Cost of sales ok.
1. Assuming 360 days in a year, then the average sales per day are: sales / 360
2. For payables you would use purchases if the figure is available. If it is not available in the question then there is no choice but to use cost of sales. (I do explain this in my free lectures).
Good morning sir.
1)When calculating Rec days do we include BAD debts into Receivables and Sales? SHould we exlude from both of them Cost +profit margin?
2)When calculating WIP/raw materials inventory days ; whats the cost of production? Is it only purchases?
Whats the cost of finished goods? Its WIP cost + purchases cost + work done to finish? i mean in the cost of finished goods there is already sitting purchase cost and WIP right?
1. There is not rule (this is not financial accounting) but normally ignore them for this purpose. (And we stopped using the term bad debts many years ago – it is irrecoverable debts).
2. Raw material goes with purchases of raw materials. Work-in-progress goes with cost of sale because it is all the costs of production – not just the cost of materials.
The cost of sales is the opening WIP + all costs of production (materials + labour + overheads) – closing WIP.
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