Working Capital Mgmt and CFAI example example

Makavelim3

page 136 #s 2 and 3, book 4

for operating cycle calculations the CFAI material uses Inventory - Ending Balance instead of taking an average of Beginning and Ending balances for the practice problems.

Why do they do this when the formulas state to use the average for this calculation?

farrukhsadiq

I just experienced the same issue...the only amounts being averaged in the CFAI EOC questions are the denominators for the averade daily "account"( i.e credit sales/365, COGS/365.)

I was STARING at the formulas in the CFAI and Schweser notes for an hour to try and figure this out but I just moved on.

shootingstar

Thanks for looking Sujan -

I am convinced this is a mistake in the books - do not know how common this is in the material but that is my take on it.

soddy1979

I have looked at the examples in the book - and I am not sure why they have chosen to take the ending inventory instead of avg. I have read in the past where the definition of avg is misinterpreted to be avg dollar cost of the remaining inventory. Surely, this can't be the meaning in the CFAI book.

Can someone please shed some light.

johnnyBuz

To calculate the inventory turnover, the denominator should be avg inventory. Anything other than the avg could leave room for manipulation.



Edited 1 time(s). Last edit at Wednesday, February 17, 2010 at 03:06AM by Sujan.

JRossSter

Jon -

Thanks for the feedback, but I have to disagree with you. The book makes no mention of such logic (averages distorting # days of inventory).

Logically, if we purchased a lot of inventory at year end, we would significantly distort our operating cycle - this does not seem like a correct approach.

I would love to get some more feedback on this...

eagles_dare13

This is my take...

Remember operating cycle is the measure of time needed to convert raw materials into cash from customers.

You are looking back over the past year at what the company did to generate business.

If you were to take the average it will make the operating cycle seem shorter b/c you are accounting for $150M less in inventory this would then lead you to conclude that the company has greater ability to generating cash.

That should directly feed into #3. Use the new numbers and subtract # days or payables.

Don't forget: Purchases = COGS + End Inv - Beg Inv



Edited 1 time(s). Last edit at Tuesday, February 16, 2010 at 03:26PM by The Jon B.