20.2 Evaluating Stock Turnover Ratio
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VCE Accounting Unit 4
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20.2 Evaluating Stock Turnover Ratio
- 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Evaluating these figures… What does this figure mean? 20.2 EVALUATING STOCK TURNOVER RATIO Stock Turnover Ratio = Average Stock Level Cost of Goods Sold = 20000 40000 = 2 On average, at any one time, the firm has $20,000 of stock on hand. $20,000 $20,000
- 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Evaluating these figures… What does this figure mean? Stock Turnover in Days = Cost of Goods Sold Average Stock x 365 = 40000 20000 x 365 = 183 days On average, at any one time, the firm has $20,000 of stock on hand. It takes the firm 183 days to sell all of its stock $20,000 $20,000 It takes the firm another 183 days to sell all of its stock again 183 days 183 days 20.2 EVALUATING STOCK TURNOVER RATIO
- 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to interpret the figure… Stock Turnover Ratio = 2.0 < Total stock is sold out 2 times this period Stock Turnover Ratio = 1.0 Total stock is sold out 1 time this period Liquidity – the firm will receive cash from sales slower < Stock Turnover Ratio = 3.0 Total stock is sold out 3 times this period Liquidity – the firm will receive cash from sales faster More stock may have been bought in bulk at a lower price The firm may have lowered prices to increase sales 20.2 EVALUATING STOCK TURNOVER RATIO
- 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to interpret the figure… < All stock is sold every 183 days All stock is sold every 95 days Liquidity – the firm will receive cash from sales faster < All stock is sold every 271 days Liquidity – the firm will receive cash from sales slower = 183 days Stock Turnover in Days = 271 days Stock Turnover in Days = 95 days Stock Turnover in Days More stock may have been bought in bulk at a lower price The firm may have lowered prices to increase sales 20.2 EVALUATING STOCK TURNOVER RATIO
- 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use But how long should it take to sell stock? What is an acceptable time to take to sell stock? 1 day? 3 days? 7 days? 30 days? 90 days? 180 days? 20.2 EVALUATING STOCK TURNOVER RATIO
- 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Comparison with turnover figures from previous reporting periods – how did we do last period compared to past periods? Comparison with management’s budgeted expectations – what did we expect to achieve? Consideration of the type of stock sold – is this ratio good given the type of stock we sell? Comparison with an industry average – what did similar businesses achieve? What did our competitors achieve? Credit terms offered – e.g. if the supplier offers you 30 day terms then stock should be sold within that time frame 20.2 EVALUATING STOCK TURNOVER RATIO
- 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Comparison with turnover figures from previous reporting periods – how did we do last period compared to past periods? = 47 days Stock Turnover in Days Good result? 2014 2015 Stock Turnover in Days 47 2014 2015 Stock Turnover in Days 31 47 2014 2015 Stock Turnover in Days 47 2014 2015 Stock Turnover in Days 64 47 20.2 EVALUATING STOCK TURNOVER RATIO
- 9. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Comparison with management’s budgeted expectations – what did we expect to achieve? Stock Turnover Ratio = 1.5 Good result? Budget Actual Stock Turnover 1.5 Budget Actual Stock Turnover 1.2 1.5 Budget Actual Stock Turnover 1.5 Budget Actual Stock Turnover 1.9 1.5 20.2 EVALUATING STOCK TURNOVER RATIO
- 10. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Consideration of the type of stock sold – is this ratio good given the type of stock we sell? = 127 days Stock Turnover in Days Good result?= 35 days Stock Turnover in Days Good result?= 3 days Stock Turnover in Days Good result? 20.2 EVALUATING STOCK TURNOVER RATIO
- 11. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Comparison with an industry average – what did similar businesses achieve? what did our competitors achieve? Stock Turnover Ratio = 18 Good result? Stock Turnover Ratio = 15 Stock Turnover Ratio = 21 Stock Turnover Ratio = 17 20.2 EVALUATING STOCK TURNOVER RATIO
- 12. © Michael Allison, Trinity Grammar School. Author’s permission required for external use How to evaluate Stock Turnover? There are several ways: Credit terms offered – e.g. if the supplier offers you 30 day terms then stock should be sold within that time frame = 38 days Stock Turnover in Days Good result? Stock Turnover = 38 days Supplier’s credit terms 30 days Stock Turnover = 38 days Supplier’s credit terms 60 days 20.2 EVALUATING STOCK TURNOVER RATIO
- 13. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ6 X SQ7 X Ex20.1 X Ex20.2 X Ex20.3 (not d) X