DUYO, EROY, GARZON, GRAELLOS, HERANA, IREMEO

INTERNAL
EFFICIENCY 01

PRESENTATION
INVENTORY VALUATION 02
 Inventory valuation refers to the
practice of accounting for the
value of a business’ inventory.
INVENTORY VALUATION
Business inventories refer to all
the supplies that a business
requires to operate, and that are
either utilized in the production
process or sold off to customers
 Inventory values can be calculated by multiplying the
number of items on hand with the unit price of the
items. In compliance with GAAP, inventory values are to
be calculated with the lower of the market price or
cost to the company.

For example, consider a coffee company with 100

HOW CAN WE VALUE? pounds of coffee beans in inventory. The market price
of coffee at the date of the inventory valuation was
$2/lb., whereas the cost of the coffee to the company
at the time of purchase was $1.50/lb. Thus, GAAP
would require accounting to use the lower of the two
numbers – in this case, the cost price of $1.50/lb.
Thus, the inventory would be worth 100 lbs x $1.5/lb
= $150.
04

A BAKERY WOULD CONSIDER INPUTS

SUCH AS FLOUR, SUGAR, OR ICING AS
RAW MATERIALS INVENTORY.
ADDITIONALLY, THE BAKERY COULD EXAMPLE
CONSIDER FRESH BAKED GOODS AS
SALES INVENTORY THAT IS AWAITING
PURCHASE FROM CUSTOMERS
 The item-by-item method utilizes the
principle described above and calculates
the inventory value based on the lower
of cost price and market price. Below is
1. ITEM-BY-ITEM METHOD an example of how this method would
apply to a lawnmower producer:
 Once we have identified which price is
lower, we can calculate the value of each
type of item in inventory by multiplying
the price by the inventory quantity. Using
1. ITEM-BY-ITEM METHOD the Item-by-Item method, we see that the
total inventory value is $770,000.
 The major category method groups inventories into
major categories. For our lawnmower example, we
might group inventories by engine size. This method
involves calculating the value of the inventories
using solely market price and cost price. Using the
2. Major category method same numbers as with the item by item method:
Using the major category method, we obtain an
inventory value of $810,000.
INVENTORY TURNS 02
 Inventory turnover measures how efficiently a
company uses its inventory by dividing the cost of
goods sold by the average inventory value during
the period.

INVENTORY turns Formula in getting inventory turns ratio:

Inventory Turns Ratio = (Cost of Goods Sold) /
(Average Inventory)

To calculate average inventory:

Average Inventory = (Beginning Inventory + Ending
Inventory) / 2
 Cost of goods sold is an expense incurred from directly
creating a product, including the raw materials and
labor costs applied to it. However, in a merchandising
business, the cost incurred is usually the actual
amount of the finished product (plus shipping cost if
any is applicable) paid for by a merchandiser from a
manufacturer or supplier.
inventory turns
Average inventory is the average cost of a set of goods
during two or more specified time periods.

Average inventory does not have to be computed on a

yearly basis; it may be calculated on a monthly or
quarterly basis, depending on the specific analysis
required to assess the inventory account.
 Republican Manufacturing Co. has a
cost of goods sold of $5M for the
current year. The company’s cost of
beginning inventory was $600,000 and
example the cost of ending inventory was
$400,000.
 A low inventory turnover ratio might be a sign of weak
sales or excessive inventory, also known as overstocking.
It could indicate a problem with a retail chain’s
merchandising strategy, or inadequate marketing.

A high inventory turnover ratio, on the other hand,

suggests strong sales. Alternatively, it could be the result
of insufficient inventory. As problems go, ensuring a
example company has sufficient inventory to support strong sales
is a better one to have than needing to scale down
inventory
RETURN ON SALES 14
 Return on sales is a financial ratio that
calculates how efficiently a company is
generating profits from its top-line revenue. It
measures the performance of a company by
analyzing the percentage of total revenue that
return on sales
is converted into operating profits.

ROS is used as an indicator of both efficiency and

profitability as it shows how effectively a
company is producing its core products and
services and how its management runs the
business.
 formula:
return on sales
CASH TO CASH CYCLE 14

TIME
 Cash-to-cash cycle time (also
known as cash-conversion cycle or
order-to-pay cycle) measures the
Cash to cash cycle
days between (1) the purchase of
materials/inventory from a
supplier and (2) payment collection
for sale of the resulting
product(s).
 To calculate cash conversion cycle, add Days
Inventory outstanding to days sales outstanding
then subtract it to days payable outstanding
Cash to cash cycle
21

DIO - DAYS INVENTORY OUTSTANDING

DAYS TO CONVERT INVENTORY INTO FINISHED
PRODUCTS AND COMPLETE THE SALES
DIO = INVENTORY/COST OF SALE*365
DSO - DAYS SALES OUTSTANDING
DAYS TO CONVERT ACCOUNTS RECEIVABLES TO CASH
DSO = ACCOUNTS RECEIVABLES / NET CREDIT FORMULA
SALES*365
DPO - DAYS PAYABLE OUTSTANDING
DAYS FOR THE BUSINESS TO PAY OFF ITS SUPPLIERS
ACCOUNTS PAYABLE / COST OF SALES * 365
 metric Company a Company B
DIO 20 days 55 days
DSO 46 days 44 days
example
DPO 27 days 33 days
= Calculations 20+46-27 55+44- 33
CASH CONVERTION CYCLE 39 days 66 Days
 https://www.accountingtools.com/articles/
the-cash-to-cash-cycle.html
https://corporatefinanceinstitute.com/reso
urces/knowledge/accounting/cash-
conversion-cycle/
references https://corporatefinanceinstitute.com/reso
urces/knowledge/finance/inventory-
turnover/
https://www.ringcentral.com/gb/en/blog/d
efinitions/return-on-sales/
https://blog.hubspot.com/sales/return-on-
sales
metric Company a Company B
DIO 20 days 55 days
DSO 46 days 44 days
DPO 27 days 33 days
Calculations 20+46-27 55+44-33
CASH CONVERTION CYCLE 39 days 66 Days