If a firm's inventory turnover is 4.0 and receivables turnover is 6.0,then it takes about five months for newly acquired inventory to generate cash.

Question

Quizplus · Accepted Answer

To calculate the number of months it takes for newly acquired inventory to generate cash, we need to use the formula:

Inventory turnover x Receivables turnover = Number of days inventory is held / Number of days in a year

If we assume 365 days in a year, then:

4.0 x 6.0 = Number of days inventory is held / 365

24 = Number of days inventory is held / 365

Number of days inventory is held = 24 x 365 = 8,760

To convert this to months, we divide by 12:

Number of months inventory is held = 8,760 / 12 = 730

Therefore, it takes about 5 months for newly acquired inventory to generate cash:

Number of months = 730 / 4.0 = 182.5 (approx. 5 months)

So, the statement is true.

If a Firm's Inventory Turnover Is 4