Inventory Holding Period

Adele69

In Osbourne 'Financial Statements' 2016 edition, page 229, question 7.4

The following information is available:
Sales revenue for the year.......... 450,000
Purchase for the year................. 250,000
Average Inventories for the year.. 50,000

The inventory holding period is:
a) 73 days, b) 41 days, c) 58 days, or d) 88 days

I used the wrong formula so know it's one I'll need to keep working on but according to my book and online the calculation should be Inventories / Cost of Sales x 365. So I took COS as (Purchases + Average Inventories) = 300,000 when to get to the answer (on page 325) it should be Purchases only 250,000.

Nowhere to hand can I find this mentioned which is very annoying. I'll look back over my distance learning notes in case they mention but when a Tutorial book doesn't give you a chance at the correct answer you have to wonder what is the point.

Is it because as an 'average' Inventory the Opening (+) and Closing (-) would cancel each other out?

RosieCarlisle

I'm on this module myself at the moment (got my exam tomorrow!) and yes, I think the way you'd work out COS would be 50 (opening inventory) + 250 (purchases) - 50 (closing inventory) = 250. So then it's 50/250 x 365 = 73 days. It is worded confusingly, I agree!

(I knocked off zeros to make it easier to type.)

DMWilson19

I think you're overcomplicating matters.

Inventories: £50,000

Cost of Sales (Purchases): £250,000 (You're not given opening/closing stock so don't worry yourself with that).