Question

1.     The Cristo Candy Corporation carries an average balance of inventory equal to $400,000. The company’s cost of goods sold averages $4.5 million. What are Cristo’s (a) inventory turnover and (b) inventory conversion period?

2.     At any point in time, Grandiron Fertilizer generally owes its suppliers $180,000. The company’s cost of goods sold averages $2.52 million. What are Grandiron’s (a) payables turnover and (b) payables deferral period (DPO)?

Answer 1

Solution:

1. a) Inventory Turnover= Cost of Goods Sold/ Average Inventory

Cost of Goods Sold= $ 45,00,000

Average Inventory= $ 4,00,000

Inventory Turnover = 45,00,000/4,00,000= 11.25 times

b) Inventory Conversion period = 365/ Inventory Turnover

Inventory conversation period= 365/11.25= 32 days

2. a) Payable Turnover= Cost of Goods Sold / Average Account Payable

Cost of Goods sold = $25,20,000

Account payable= $1,80,000

Payable Turnover= 25,20,000/180000= 14 times

b) Payable deferral period (DPO) = 365/ Payable Turnover

Payable deferral period= 365/14= 26 days