Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS4.7.4.1 Stock Turnover RatioThis is computed as follows:(a)(b)Average Turnover Period= Average StockCost of SalesORx 365 daysNumber of times stock is turned overCost of Sales = No. of times per annumAverage StockThe (a) variant, expressed in days, is an indication of thenumber of days stock is kept in the store or warehouse beforebeing sold and therefore replaced. The second variant gives thenumber of times stock is turned over in the year. It is anindication of the speed with which stock moves through thebusiness. In a manufacturing concern, stock turnover ratio canbe calculated for each type of stock namely, raw materials, workin-progressand finished goods so as to assist in the calculationof the operating cycle. It must be noted that this ratio should beinterpreted in the light of the type of business being carried on.For instance, a higher stock turnover ratio (in terms of number oftimes) will normally be expected for perishable goods than fornon-perishable goods.4.7.4.2 Debtors’ Turnover RatioThis expresses the average period for which credit is allowed.It is calculated thus:(a)Average DebtorsCredit SalesORx 365 days(b)Number of times debtors figure is turned overCredit SalesAverage Debtors= Number of times per annumORSalesTrade Debtors= Number of times per annumThe third formula indicates that when credit and cash sales arenot clearly distinguished, total sales figure could be used.Furthermore, when the opening balance of trade debtors is notavailable, the closing balance alone could be used in the80