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ACCT 301 Lecture Notes - Fixed Asset, Finished Good

Course Code
ACCT 301

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Chapter 23
Stock Turnover Period = Avg. Stock Level X 365
Cost of Goods Sold
1. Measures the speed with which a company turns over its stock
2. Multiplying the ratio by 365 represents this ratio in terms of days that elapse
between the date that goods are delivered by suppliers and dispatched to customers.
I.e. the stock holding period.
3. Companies must strive to keep the stock holding period as low as possible in order
to minimize associated costs.
4. A reduction in the average period for which stocks are held, suggests that the
purchasing, distribution, and selling functions have been streamlined
5. Higher sales and market activity, usually increases the stock figure to ensure that
additional consumer requirements can be met without delay.
6. An increase in sales without a similar increase in stock means that resource which
would otherwise be tied up in stock, is available for use elsewhere in the business.
Rate of Collection of Debtors (Debtor’s Payment Period)
Avg. Trade Debtors X 365
Credit Sales
1. The higher the figure, the more it is assumed that money tied up in debts are
resources that are yielding no return and also losing value during a period of inflation.
2. Therefore the reasons for the change should be carefully investigated, to find out
a) There was an increase in the credit period to generate more sales
b) There is slackness in the credit-control department.
3. Please note that the sales figure in the P&L is exclusive of VAT but the debtor’s
figure is inclusive.
Rate of Payment of Creditors = Avg. Trade Creditors X 365
Credit Purchases
1. Measures the average period of time taken by companies to pay their suppliers.
2. A change in the rate of payment may well reflect an improvement or decline in
3. Normally it is expected that rate shouldn't vary very much from year to year.
The Cash Operating Cycle:
Stock Turnover of Raw Materials
Add: Turnover of Work in Progress
Turnover of Finished Goods
Rate of Collection of Debtors
Less: Rate of Payment of Creditors
1. A period of time elapses between the payment for goods or raw materials received
into stock and the collection of cash from customers in respect of their sale. The gap
is known as the Cash Operating Cycle' and, during this period of time, the goods
acquired, together with the value added in the case of a manufacturer, must be
financed by the company.
2. The shorter the length of time between the initial outlay and the ultimate collection
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