[ObsceneTickmark]

Could somebody please check my understanding of the logic behind these activity ratios? I’m spinning my wheels and may be over-thinking them, so I’m looking for verification.

Inventory Turnover: (COGS / Avg. Inventory) means that holding inventory constant (via averaging) we would need to “turn” or sell, an entire cycle of the computed average inventory X number of times in order to arrive at the reported COGS.

AR Turnover: (Net Credit Sales / Avg. Net AR) means that in order to keep AR constant (via averaging), we would need to collect that averaged figure X amount of times in relation to the amount of credit sales we booked to AR throughout the year.

Enter my logic question. If we are dividing the COGS and Credit Sales by these averaged amounts, respectively, wouldn’t the amounts stated for the averaged amounts should really be ZERO on the balance sheet?

Example of AR Turnover: Net Credit Sales = $1,800,000 / Average AR = $295,000 Turnover Ratio = 6.1 Times

Is what we’re saying that to keep AR around $295,000 ,we have to collect that amount 6.1 times? If we collect it 6.1 times throughout the year though, there wouldn’t even be an “ending AR” to factor into the calculation. This ratio seems to refer to what it would take to collect all net receivables. It seems to me the calculation should subtract out the average AR in the numerator before dividing to allow for the amount of receivables still on the books at year end.

Thanks for your help.