Working Capital Management Turnover Ratios

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Akeg

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Question:
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My Solution:
  • 20,000/2,150= 9.3023 (INV Turnover)
  • 365/9.3023=39.2375 (Number Days in inventory)
  • 25,000/2,500=10 (Receivable Turnover)
  • 365/10= 36.5 (Number Days in receivables)
  • 36.5+39.2375= 75.74 (Operating Cycle)
However the correct answer is 78.5. The reason I am getting the wrong answer is because I am using average inventory in my denominator for my inventory turnover ratio, where as CFAI is using the ending inventory balance in the denominator. I thought that as long as beggining/ending inventory balances were given we are suppose to use the average instead of ending. Can anyone shed some light on this?
 
I am also curious about this one.
Are you actually sure that we are always supposed to use averages whenever beginning and ending values are provided. So far I was not able to recognize a pattern there (or find related information in the curriculum).
 
Aren’t you also supposed to calculate purchases and thus the number of days payable?
 
Yes, for purchases you need to compute COGS + Change in Inventory.
But here we are computing the operating cycle not the net operating cycle, so we do not subtract days payable at the end.
 
I have a feeling that using a averages is something that is done in FRA (it is mentioned there specifically as a way to account for the high fluctuation in some variables).
In Corporate Finance, Reading 39 p.146, the formula for Number Days in inventory instead uses Inventory not Average Inventory. Hopefully, in the exam, the answer choices won’t make us a choose between both methods.
 
In the CFAI corporate finance they say “avg inventory”, but calculate it using ending balance. In Kaplan they strictly use “avg inventory”. Luckily all of the problems I have done contained answers that were significantly different then one another so I can usually make an educated guess and get the right answer.
 
That is interesting, however, the reason may be, there is no such thing like standards in financial analysis or ratios (unlike GAAP, IFRS and such), so each analyst may choose the way he/she want to compute ratio(s) and behind that decision is always some argument. So both answers are correct, for the exam you may think to calculate with avg and without :) and then take most closest answer that is given. I think they have stated it in FRA, you must understand the concept, there may be no pattern here to follow. At least, that is my reasoning.
EDIT: found it, it is Kaplan, Book 3, p. 136, Exam Focus:
“Different analysts calculate some ratios differently” and “Do not get too tied up in the details of each ratio, but understand…”. Read all exam focus.
 
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