How many days cash is tied up at each stop

◈ 7 cards

Compute receivable, inventory and payables turnover and convert each to days on the course’s conventions: 365 days, credit sales for receivables, cost of goods sold (or purchases where given) for inventory and payables.

Turnover, then days

An activity ratio asks how many times a year a balance-sheet account is used up and replaced — the turnover — and then converts that into the more intuitive number of days the balance sits before it turns into cash or is paid:

$Turnover = \frac{annual flow through the account}{average balance} Days = \frac{365}{turnover}$

The only judgment is which flow matches which balance. Receivables are created by credit sales, so revenue is their flow (all of Tamarack’s sales are on credit). Inventory and payables are created by buying goods, so their flow is cost of goods sold — or purchases, when the question gives them. A 365-day year throughout.

Tamarack 2025

Receivables. Revenue 4,800 over average receivables 540:

$Receivable turnover = \frac{4 , 800}{540} = 8.89 Days receivable = \frac{365}{8.89} = 41.1 days$

A customer takes about 41 days to pay. If Tamarack’s terms are net 30, that is eleven days of slippage — a collections question.

Inventory. Cost of goods sold 2,880 over average inventory 640:

$Inventory turnover = \frac{2 , 880}{640} = 4.50 Days inventory = \frac{365}{4.50} = 81.1 days$

A tent sits in the warehouse or on the shelf for about 81 days before it is sold. Seasonal retailers carry long inventories; the number is read against last year and against the sector.

Payables. Cost of goods sold 2,880 over average payables 440:

$Payables turnover = \frac{2 , 880}{440} = 6.55 Days payable = \frac{365}{6.55} = 55.8 days$

Tamarack takes about 56 days to pay its suppliers. Days payable is the one number here where longer is better for the company’s cash — up to the point where suppliers notice (lesson 10.6).

When purchases are given

Cost of goods sold is a proxy for purchases; the two differ by the change in inventory. Tamarack’s inventory rose from 560 to 720, so

$Purchases = COGS + Δ inventory = 2, 880 + 160 = 3, 040$

On a purchases basis the payables turnover is 3,040 ÷ 440 = 6.91 and days payable 52.8. When the exam gives purchases, use them; when it gives only COGS, use COGS and say so. The convention matters less than stating it — and it matters a great deal that the numerator and denominator are on the same basis.

Reading a rising days-inventory

Suppose days inventory had risen from 70 to 81 in a year when revenue grew 20 %. Three readings compete: the company built stock deliberately ahead of growth; the mix has shifted toward slow-moving lines; or some of the stock is not selling and an LCNRV write-down is coming (Module 2 — and lesson 9.4 showed what that does to a covenant). The ratio raises the question; the inventory ageing answers it. A ratio that has moved is always a question, never a conclusion.