duration in Activity ratios correct, standard, practice, 180, 365

kim226

Number of days within Activity Ratios use 365 days as a standard practice for duration.

However, if the operating cycle is less than 365 days- would it be appropriate to substitue the new duration?

i.e. if the operating cycle is 180 days THEN

days of inventory on hand = 365/inventory turnover

WOULD BE CHANGED TO

days of inventory on hand = 180/inventory turnover

Is this correct.

draz

generally, you need to annualize these numbers for comparison purposes, so for example, if you are doing a quarterly ratio analysis, you would multiply the AR for the quarter by 4 if you are doing receivables turnover so that quarterly ratios can be compared to YE ratios. hope this helps.