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Is it correct to say that a reduction in inventory turnover will as well mean a reduction in inventory days?
Since we’re selling out the inventory quickly although it’s on credit.
No. You are confusing together three different things!
Inventory turnover is purchases / inventory.
The lower the inventory days, the less inventory they are holding, and therefore the greater will be the inventory turnover.
It is irrelevant whether the inventory is purchased on credit or not.
Lower inventory could be as a result of over-trading, but on its own would not necessarily mean they were over-trading – it could simply be that they were managing inventory more efficiently.
So if we do have a lower inventory period but an extremely high receivable period which (on average) rarely occurs in that particular industry, that would be overtrading?
They could be indicators, would it would not necessarily mean over-trading.
Have you watched my lectures on this? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exams well.
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