I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART H: INTERPRETATION OF FINANCIAL STATEMENTS 

 

472

 

are held for. As with the average receivable collection period, however, it is only an approximate 

estimated figure, but one which should be reliable enough for comparing changes year on year. 

FORMULA TO LEARN 

The inventory turnover period is calculated as: 

sales

of 

 

Cost

Inventory

  365 

 

This is another measure of how vigorously a business is trading. A lengthening inventory turnover period 

from one year to the next indicates one of two things. 

(a) 

A slowdown in trading 

(b) 

A build-up in inventory levels, perhaps suggesting that the investment in inventories is becoming 

excessive 

Generally the higher the inventory turnover is the better, but several aspects of inventory-holding policy 

have to be balanced. 

(a) Lead 

times 

(b) 

Seasonal fluctuations in orders 

(c) 

Alternative uses of warehouse space 

(d) 

Bulk buying discounts 

(e) 

Likelihood of inventory perishing or becoming obsolete 

Presumably if we add together the inventory turnover period and receivables collection period, this should 

give us an indication of how soon inventory is converted into cash. Both receivables collection period and 

inventory turnover period therefore give us a further indication of the company's liquidity. 

4.11 Examples: inventory turnover period 

The estimated inventory turnover periods for a supermarket are as follows. 

  

Inventory 

turnover 

   

Company 

Inventory period   

 

 

Cost of sales 

(days 



 365) 

Previous year 

Supermarket 

$15,554K

$254,571K

 

22.3 days 

$14,094K

$261,368K

   365  = 19.7  days