Practice exam 1 - Question 7 d) calculating Inventory Holding Period

I am wondering if someone could give me some help with a question from the MDCL practice exam 1 please.

The formula I am given in my textbook for calculating Inventory Days is:-

Inventories/Cost Of sales x 365

I can understand this ratio when using the simple example provided in my textbook (all figures are already provided) but when I am trying to apply this ratio to the exam question I am becoming lost.

What is meant by 'Inventories'? Does this mean Opening + Purchases - Closing Inv?

How am I calculating cost of sales? Is it Revenue - Purchases or Payables?

The question is as follows:-

Revenue - 1,350,400
Opening Inv -122,658
Purchases - 849,200
Closing Inv - 110,000
Receivables - 369, 973
Payables - 118, 063


Calculate the Inventory Holding Period in days.

Comments

  • PeterCPeterC Posts: 149Registered, Tutor
    Opening inventory + Purchases - Closing inventory is COST OF SALES, not Inventories. I expect you knew that.

    One question remains, for "Inventories". Should you use the average (of opening and closing) or the closing inventory? Average is theoretically better but see if your textbook suggests which to use.
  • philreddy1985philreddy1985 Posts: 23Registered
    Hello Peter,

    Thank you for your response, the textbook I am using just states Inventories / COS x 365

    It does not say whether this is Opening/Closing or the average.

    I am suitably confused as this equation is only afforded half a page in my textbook with no further explanation given.
  • PeterCPeterC Posts: 149Registered, Tutor
    Having looked in the Kaplan AAT textbook, I see that they recommend using the average if possible, but they point out that you are sometimes only given one value for inventory (which makes it easier).
  • philreddy1985philreddy1985 Posts: 23Registered
    I have managed to reach the correct answer by using the average inventory value and dividing this by the COS x 365.

    116329 / (COS) 861858 x 365 = 49

    Thank you for your help.
  • PeterCPeterC Posts: 149Registered, Tutor
    You're welcome
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