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Question of the use of inventory days in real use.
To calculate the inventory days = Stocks / Cogs x 365 days.
Company uses self criteria to provision for stock due to no movements or aged over x years..etc.
However, it could be sold at normal price.Thing is, if a significant amount has been provision or written off from balance, the ratio would give us favorable change (days would decrease with less stock) and it would not reflect the poor management of the stock.
So question is: if there are provision of stock obsolete, should we reduce the stocks? Or should the stocks (of the formula) be the total amount including whatever stock that has been provisioned as obsolete?ACCA course
Thanks and best regards!
Welcome to the Opentuition forums. I think you are right. The gross inventory before provisions should probably bel used to avoid the problems you have identified in real world scenarios. A separate analysis should be done on level of provision to analyse any problems with inventory Management.
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