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Hello sir, i just watched the free lecture on financial performance measurement. On the Free lecture notes chapter 26 example 1, you used cost of sales to calculate the trade payables collection period.. on the available information given, i think we could have calculated the purchases. the closing inventory for 2006 would be the opening inventory for 2007.. we are also given closing inventory for 2007. thus opening inventory + Purchases – Closing inventory = cost of sales
871 + X – 1006 = 5385
X= 5520
Purchases = 5520$ for 2007using same method for 2006 with this time assuming no opening inventory because no information available for it, purchases = 5083$
Secondly for the inventory days, the formula given is (inventory/cost of sales) *365. Should we use only closing inventory or opening + closing?
I do not know if i am right. im confused about these.. Please help.. thank you in advance 🙂
The problem is that you can’t assume no opening inventory for 2006 and so you would not be comparing like with like.
If all you were asked to do was calculate it for 2007, then certainly calculate the purchases and use them.
However if we are asked to compare two years, then you must calculate them the same way and so use cost of sales instead.thank you very much sir.. and for the inventory days formula, should we use opening + closing or just closing?
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