Inventory Holding Days - Help Needed

JagodaBlue

Hi!

Can someone explain how do we know if we should use the closing inventory or the average inventory when calculating the inventory holding days? I have both opening and closing inventory stated in question but in the answer they use the closing inventory instead of average.


A business has inventories at the beginning of the year of £400,000 and at the end of the year of £450,000. During the year the business had sales revenue of £4,250,000 and cost of sales of £3,650,000, providing a gross profit of £600,000. The inventory holding period is ? (45 days.)

There is no mention in the question to use the closing instead of average and is confusing as it seems random.

shamilkaria

Hi @JagodaBlue

I hope you are well?

I could help you with this question but I had to ask, did they provide you with the 45 Days Inventory Holding Days figure or was that in the answer?

Many thanks

Shamil

JagodaBlue

Hi! @shamilkaria

the 45 days was in the answer.

shamilkaria

Hi @JagodaBlue

Thanks for confirming that was the answer 🙂.

So it seems as though they are basing it on closing inventory valuation because the way to work out inventory holding period in days is

(Inventories / Cost Of Sales) x 365 Days. So (£450,000 / £3.650,000) x 365 Days = 45 Days.

Don't worry this question is a bit weird, generally when you get asked to work out the inventory holding period in days based on my knowledge from Financial Statements exams is that they will provide you with a balance sheet and inventories will be on there in the current assets section so from there you can work it out. With regards to this being under Applied Management Accounting I am not too sure how they would show this in the exam but I assume would be a similar way based on Balance Sheet. Final thing based on your question provided I think they go by closing inventory so best just to stick with that if you get any other questions like that.

Hope this helps

Kind regards

Shamil

JagodaBlue

thank you! Will do just that then

shamilkaria

Hi @JagodaBlue

No worries most welcome 🙂.

Try and see another similar question if they do use closing inventory, I assume they would but just to confirm.

Kind regards

Shamil