1.15 activity (working capital) ratios

1. 1.15 Activity/
Working Capital ratios

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Learning outcomes
 Identify financial ratios
 Use financial ratios for analysis
DOWNLOAD MATERIALS:
1.15 Study guide: Activity / Working Capital Ratios
NEW: Apple Inc FS Industry Average

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Managing your priorities
If you are to set a deadline for the
following activities, how many days will
you set for each of the activities to be
completed?

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Managing your priorities
Days to collect payment from clients
- Days to get a product to sell
- Days to delay payment to suppliers/
vendors

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Managing your priorities
We will review these decisions later
after the class.

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Why do you think the
“BUY NOW PAY LATER”
selling tactic works?
What is the implication of this tactic to a
business?

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Today’s ratios:
Activity and Working Capital Ratios serves
as an indicator of day today operational
performance especially in inventory
movement, collection of credit and
efficiency in operations. These ratios can
have a huge impact on cash flow.

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Inventory turnover is a measure of the
number of times inventory is sold or used
in a given time period such as one year. It
is a good indicator of inventory quality
(whether the inventory is obsolete or not),
efficient buying practices, and inventory
management.

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. This ratio is
important because
gross profit is
earned each time
inventory is turned
over. Also called
stock turnover.

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REFER to the APPLE INC Financial
Statements
Compute for the Accounts Receivable
Turnover for both 2018 and 2017
Wait for your name to be called

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Inventory turnover = Cost of Goods Sold / Inventory
Inventory turnover = 163,756 / 3,956
Inventory turnover = 41.4 or 41 times inventory is sold
in a business year 2018

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The number of days in the period can then be
divided by the inventory turnover formula to
calculate the number of days it takes to sell the
inventory on hand or "inventory turnover days":
Days in Inventory = 365 / Inventory Turnover
Days in Inventory = 365 / 41
Days in Inventory = 9 days, it takes 9 days for
Apple to deplete its inventories in sales

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Compute for the Inventory Turnover Ratio and
Days in inventory for the year 2017
Ans. 29 times, 12 days

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Knowing how many days it takes to move
a product allows you to:
 Anticipate number of times you need to
order from suppliers
▰Project sales in units
▰Budget the cash coming in from sale of
inventory

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Accounts Receivable Ratio
The receivable turnover ratio (debtors
turnover ratio, accounts receivable
turnover ratio) indicates the velocity of a
company's debt collection, the number of
times average receivables are turned over
during a year.

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Accounts Receivable Ratio
▰This ratio determines how quickly a company
collects outstanding cash balances from its
customers during an accounting period. It is an
important indicator of a company's financial
and operational performance and can be used
to determine if a company is having difficulties
collecting sales made on credit.

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Accounts Receivable Ratio = Sales / Accounts
Receivable
Accounts Receivable Ratio = 265,595 / 48,995
Accounts Receivable Ratio = 5 times in a business year
that Apple was able to collect sales on credit

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Days in Receivable Ratio measures the length of time (in
days) the accounts receivable are collected and
converted to cash
Days in Receivable Ratio = 365/Accounts Receivable ratio
Days in Receivable Ratio = 365 /5
Days in Receivable Ratio = 73 days, it takes 73 days to
collect and convert accounts receivable into cash

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Compute for Accounts Receivable Ratio for 2017 and
Days in Receivable
Accounts Receivable Ratio = Sales / Accounts Receivable
▰ANS: 6.42 , 56 days

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Put together the number of days to make
a sale and the days of inventory and days
in receivable, how many days is Apple out
of cash?
9 days to sell
73 days to collect
= 82 days out of cash

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• Being out of cash means there is need
to get the company’s cash from
somewhere else like borrowing it, selling
stock or delay paying its
suppliers/vendors for as long as possible

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Accounts Payable Ratio
Accounts payable turnover ratio is an
accounting liquidity metric that evaluates
how fast a company pays off its creditors
(suppliers).

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Accounts Payable Ratio
The ratio shows how many times in a given
period a company pays its average accounts
payable. An accounts payable turnover
ratio measures the number of times a
company pays its suppliers during a specific
accounting period.

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Accounts Payable Ratio = COGS / Accounts Payable
Accounts Payable Ratio = 163,756 / 55,888
Accounts Payable Ratio = 2.9 times in a business year that
Apple pay its vendors/suppliers

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Days in Payable Ratio measures the length of time (in
days) the accounts payable are paid
Days in Payable Ratio = 365 / Accounts Payable
Days in Payable Ratio = 365 / 2.9
Days in Payable Ratio = 125 days, it takes 125 days to pay
its obligations in accounts payable

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Accounts Payable Ratio = COGS / Accounts Payable
Compute for accounts payable ratio and days for 2017
ANS: 2.87, 127 days in accounts payable

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What can happen if it takes
a company too long to pay
its accounts payable?

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• Although it is good to delay payment
of accounts receivable, note that the
relationship with your vendors and
suppliers are at stake if it takes you too
long to pay your obligations.

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Putting this all together gives us the CASH CONVERSION
CYCLE, it is the length of time the company is out of cash
due to the time it takes to sell its products, collect its
receivable and the fact that the suppliers want to be paid
the sooner rather than later.
Businesses want the lowest possible cash conversion
cycle – meaning they are out of cash for a short amount
of time.

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Cash Conversion Cycle = (Days in Inventory + Days in
Receivable) – Days in Payable
Cash Conversion Cycle = ( 9 + 73 ) – 125
Cash Conversion Cycle = - 43 days
What is your assumption from the cash conversion cycle
of Apple? What is your recommendation?

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Cash Conversion Cycle = (Days in Inventory + Days in
Receivable) – Days in Payable
Cash Conversion Cycle = ( 9 + 73 ) – 125
Cash Conversion Cycle = - 43 days
What is your assumption from the cash conversion cycle
of Apple? What is your recommendation?

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Connect learnings today to your
performance task.
*Answer your PETA file, fill out the Asset and
Fixed Asset turnover ratios based on the financial
statements of Glow&Co Company
Complete the computations as we
finish each topic
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