Question 2.4: Compute Global’s accounts payable days, inventory days, and ...

PLAN AND ORGANIZE 
Working capital ratios require information from both the balance sheet and the income statement. For these ratios, we need inventory and accounts payable from the balance sheet and cost of goods sold from the income statement (often listed as cost of sales).

Inventory = 15.3, Accounts payable = 29.2, Cost of goods sold (cost of sales) = 153.4

EXECUTE

Accounts payable days = \frac {Accounts  Payable} {Average  Daily  Cost  of  Goods  Sold} = \frac {29.2} {\left(153.4/365\right)} = 69.48

Inventory days =\frac {Inventory} {Average  Daily  Cost  of  Goods  Sold} = \frac {15.3} {\left(153.4/365\right)} = 36.40

Inventory days =\frac { Cost  of  Goods  Sold} {Inventory} = \frac {153.4} {15.3} = 10.03

EVALUATE
Assuming that Global’s accounts payable at year-end on its balance sheet is representative of the normal amount during the year, Global is able, on average, to take about 69.5 days to pay its suppliers. This compares well with the 27.5 days we calculated that it waits on  average to be paid (its accounts receivable days). Global typically takes 36 days to sell its inventory. Note that inventory turnover and inventory days tell us the same thing in different ways—if it takes Global about 36 days to sell its inventory, then it turns over its inventory about 10 times per 365-day year. In Chapter 19 on working capital management, we’ll see how a company’s receivable, inventory, and payable days make up its operating cycle.