![]() ![]() ![]() I can still recall the number of times I dozed off while studying, or just going back and forth trying to understand even the simplest concept. Having no background in finance at all, I tried very hard to read the curriculum from cover to cover, but eventually that fell flat. To compound my problems, I basically did not have a preparation strategy. ![]() It was not until the middle of March 2014 that I realized I only had a little more than 2 months to the exam. I naturally neglected the preparation for my Level I exam in June 2014. Was it tough? You bet!Īdjusting to the drastic career change was tough. Having developed a keen interest in finance, I decided on a career switch to the finance field and enrolled into the CFA program at the same time. I am a Computer Engineering graduate and have been working as an engineer all my life. Exampleįollowing are the extracts of XYZ Company’s financial statements for the year ended 31 December 2021.Are you a CFA Level I candidate, or someone who is exploring taking the CFA exam? Four years ago, I was in your shoes. The same data will be used in all the posts related to various efficiency ratios. It is important to investigate the reasons for higher average holding periods of inventory and take appropriate remedial actions on timely basis.Ĭonclusion: Generally speaking, relatively lower inventory days indicate efficient inventory management whereas relatively higher inventory days indicate inefficient inventory management.įollowing is an example related to calculation of inventory days. This may be due to decrease in the demand of product, or it may be due to over purchasing of inventory. In such cases, the management should look into the reasons for greater inventory holding period. On the other hand, relatively higher inventory days suggest inefficient inventory management as the business would be suffering higher inventory holding costs and opportunity costs of money tied up in inventory. However, the inventory must not be too low that the business is unable to fulfill the customer orders, thus losing sales revenue. It means that the company is saving inventory holding costs (warehouse rent, other storage costs etc.) and opportunity costs of money tied up in inventory. Secondly, lower average inventory days indicates that the average inventory balance during an accounting period is relatively on the lower side, which is a good thing in general. Why relatively lower average inventory days is considered a good thing? Firstly, it is good that the business is converting the inventory into sales pretty efficiently. Here’s some explanation of what has been said. ![]() Company’s own inventory days of prior periods.Similar company operating in the same industry.Comparison can be made with either of the following: However, average inventory days vary across different industries, so you should be careful while comparing inventory days. Generally speaking, relatively lower inventory days is considered good as it indicates shorter average holding period of inventory. We have initially claimed that this ratio speaks about how efficiently a business has managed its inventory. Let’s go into the detail of inventory days ratio. If the prior year’s balance sheet ( comparative information) is not available, inventory days can then be calculated by substituting closing inventory instead of average inventory in the above formula. Cost of goods sold is disclosed in the income statement, whereas information about opening and closing inventory can be obtained from the current and prior years’ balance sheets. Information for calculating the inventory days is extracted from the financial statements. Inventory turnover tells us how many times the inventory got converted into sales during an accounting period.Inventory days tells us how many days on average are taken by an entity to convert the inventory into sales, or you can say it tells us the average holding time of inventory during an accounting period.Both ratios give information about how efficiently the management of a business has converted its inventory into sales. In other words, this ratio is a measure of average time in days taken by a company to convert its inventory into sales.īoth inventory turnover and inventory days are efficiency ratios that speak about the management of inventory, but from different angles. Inventory days, also known as “days inventory outstanding (DIO)”, is a financial ratio showing the average holding period of inventory before it is used or sold. ![]()
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