Question

Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis), accounts payable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio

Answer 1

Answer:

5.84

Explanation:

The formula for inventory turnover is

= Cost of goods sold / Inventory

However, we need to calculate first sales, using PDP equation, which is given as;

PDP = Receivables / [ Cost of goods sold / 365 ],

Alternatively,

Cost of goods sold =

365 [Payables] / DSO

Where ;

Payable = $100m

DSO = 50 days

Inventory = $125m

= (365 * $100) / 50

= $730m

Recall inventory turnover = Cost of goods sold / Inventory

= $730m / $125m

= 5.84