14RQ - Horngren'S Financial And Managerial Accounting

Question

How is days’ sales in inventory calculated, and what does it measure?

Step-by-Step Solution

Answer

Days’ sales in inventory are calculated for getting the time period for converting to sales by comparing the number of days to the inventory turnover for a particular period.

Days’ sales in inventory

Days’ sales in inventory are the ratio between the number of days in a year and the inventory turnover. It is computed as –

 

$\mathbf{\text{Day's sales in inventory = }}\frac{\mathbf{365}\mathbf{ }\mathbf{\text{days}}}{\mathbf{\text{Inventory turnover}}}$

Interpretation of days’ sales in inventory

Days’ sales of inventory measure the number of days the inventory is held in stock or the number of days taken for converting inventory into sales.  

Inventory turnover is the number of times the inventory is sold during a period. So when this figure is compared with the number of days of that period, it provides the result of days taken to convert the inventory into sales.