Page 265 - Microsoft Word - 00 IWB ACCA F7.docx

Interpretation of financial statements

2.6 Inventory ratios: reasons for movement

 improved/worse inventory control

 obsolete inventory

 increased level of inventory to stimulate sales

2.7 Receivables collection period: calculation

Receivables
———————— × 365 days

Revenue

 average number of days to collect receivables balances

 lower days = higher efficiency

2.8 Receivables collection period: reasons for movement

 improved/worse credit control

 irrecoverable debts

 increased credit terms to stimulate sales

2.9 Payables payment period: calculation

Payables
———————— × 365 days
Credit purchases*

*In the exam it is considered acceptable to substitute cost of sales for credit
purchases.

 average number of days taken to pay suppliers

 higher days = greater benefit

2.10 Payables payment period: reasons for movement

 new credit arrangement

 new supplier

 higher days may indicate inability to pay

Increasing payment period may give company reputation as poor payer.

259