Days in inventory (also known as "Inventory Days of Supply", "Days Inventory Outstanding" or the "Inventory Period" [1] ) is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The ratio measures the number of days funds are tied up in inventory. Inventory levels (measured at cost) are divided by sales per day (also measured at cost rather than selling price.)
The formula for days in inventory is:
where DII is days in inventory and COGS is cost of goods sold. The average inventory is the average of inventory levels at the beginning and end of an accounting period, and COGS/day is calculated by dividing the total cost of goods sold per year by the number of days in the accounting period, generally 365 days. [2]
This is equivalent to the 'average days to sell the inventory' which is calculated as: [3]
The article on inventory turnover provides a more complete discussion of issues related to the diagnosis of inventory effectiveness, although it does not provide these synonyms.
FIFO and LIFO accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feedstocks. They are used to manage assumptions of costs related to inventory, stock repurchases, and various other accounting purposes. The following equation is useful when determining inventory costing methods:
Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
In management accounting, the Cash conversion cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in inventory in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and tax payments is not always sustainable.
An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.
In mathematics, a rate is the ratio between two related quantities in different units. If the denominator of the ratio is expressed as a single unit of one of these quantities, and if it is assumed that this quantity can be changed systematically, then the numerator of the ratio expresses the corresponding rate of change in the other (dependent) variable.
Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount". An investment normally counts as a cash equivalent when it has a short maturity period of 90 days or less, and can be included in the cash and cash equivalents balance from the date of acquisition when it carries an insignificant risk of changes in the asset value. If it has a maturity of more than 90 days, it is not considered a cash equivalent. Equity investments mostly are excluded from cash equivalents, unless they are essentially cash equivalents.
In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.
In accountancy, days sales outstanding is a calculation used by a company to estimate the size of their outstanding accounts receivable. It measures this size not in units of currency, but in average sales days.
The return on equity (ROE) is a measure of the profitability of a business in relation to the equity. Because shareholder's equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on assets minus liabilities. ROE measures how many dollars of profit are generated for each dollar of shareholder's equity. ROE is a metric of how well the company utilizes its equity to generate profits.
Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however the terms are different: "gross profit" is technically an absolute monetary amount and "gross margin" is technically a percentage or ratio.
Gross Margin Return on Inventory Investment (GMROII) is a ratio in microeconomics that describes a seller's return on every unit of currency spent on inventory. It is one way to determine how profitable the seller's inventory is, and describes the relationship between the profit earned from total sales, and the amount invested in the inventory sold. Generally for a seller, the higher the GMROII the better. Since the inventory is a very widely ranging factor in a seller's investment in working capital, it is important for the seller to know how much he might expect to gain from it. The GMROII answers the question "for each unit of average inventory held at cost, how many units of currency of gross profit I generated in one year?" GMROII is traditionally calculated by using one year's gross profit against the average of 12 or 13 units of inventory at cost. GMROII may vary depending on which segment we are analyzing, but a rule of thumb is that a GMROII of typical retailer is above 3.0.
In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, merchandise turnover, stockturn, stock turns, turns, and stock turnover.
Asset turnover (ATO), total asset turnover, or asset turns is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. Asset turnover is considered to be an Activity Ratio, which is a group of financial ratios that measure how efficiently a company uses assets. Asset turnover can be further sub-divided into fixed asset turnover, which measures a company's use of its fixed assets to generate revenue, and working capital turnover, which measures a company's use of its current assets minus liabilities to generate revenue. Total asset turnover ratios can be used to calculate Return On Equity (ROE) figures as part of DuPont analysis. As a financial and activity ratio, and as part of DuPont analysis, asset turnover is a part of company fundamental analysis.
The debtors days ratio measures how quickly cash is being collected from debtors. The longer it takes for a company to collect, the greater the number of debtors days. Debtor days can also be referred to as Debtor collection period. Another common ratio is the creditors days ratio.
Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.
Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers.
A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
The UVA method is an accounting and decision-making tool, based on calculating the cost of sales. Unlike management accounting, which calculates product margins, the UVA method calculates the result generated by each sale. The UVA method relies on a very detailed analysis of all costs related to products, customers, orders, and deliveries. It introduces the notion of a single measure unit, which applies to all the operations in the company. The method relies on an equivalent-based approach.