ACCA Performance Management (F5) Certification Practice Exam

How is the inventory holding period calculated?

1. Inventory / Sales x 365

2. Inventory / Cost of sales x 365

3. Cost of sales / Inventory x 365

4. Cost of sales / Sales x 365

The correct answer is: Inventory / Cost of sales x 365

The inventory holding period is an essential metric that indicates how long it takes to sell the entire inventory, which is crucial for assessing the efficiency of inventory management. The correct calculation for the inventory holding period is derived by using the cost of sales rather than total sales. Using the cost of sales in the calculation is important because it provides a more accurate reflection of the actual goods that are being sold, which directly relates to the inventory on hand. The formula calculates how many days, on average, a company holds its inventory before it is sold. By dividing the inventory balance by the cost of sales and then multiplying by 365, you're determining how many days the average inventory lasts before being sold. This provides a realistic gauge of how well inventory is managed in relation to the costs associated with it. Calculating the inventory holding period using sales figures without considering costs could lead to misunderstandings about inventory turnover and overall financial health. Therefore, using the cost of sales is the appropriate method for accurately determining the inventory holding period.