inventory turnover average, noticed

koba

If they give you two years inventory figures, use the average. If only the ending year is provided, use that.

MythosHF

mbolzicco is correct. Best practice when using mixed ratios that involve the income statement and balance sheet is to use average balance sheet figures. Why?

The income statement reflects cumulative activity over a period of time (between fiscal years), whereas the balance sheet is a snapshot at a single point in time (FYE). The use of balance sheet figures that aren't averaged exposes you to the risk that extreme changes in assets or liabilities that may have occurred at the beginning/end of a FY misrepresent activity throughout the FY. It would be quite easy to game these types of financial metrics.

I'll wager it's this type of logic that leads the Treasury Stock Method to require weighted-average basic common CSO for basic EPS, rather than simply basic common CSO at FYE.

Anyway, just think of income statement figures paired with average balance sheet figures as a more credible alignment of time periods.

Just my $0.02.

islandgyrl

the book says inventory tunover= COGS/average inventory, but in many instances in the book, ending inventory was used. has anyone noticed this?

Penny-wenny

thanks, yep, should go through faq on CFA website as well