Days inventory. A measure of how long it takes a company to sell the average amount of inventory on hand during a given period of time. The longer it takes to sell the inventory, the greater the likelihood that it will not be sold at full value—and the greater the sum of cash that gets tied up. To calculate days inventory, divide the average amount of inventory on hand for the period by the cost of goods sold for the same period, then multiply that quotient by 365. Days payables. A measure that tells how many days—based on balance sheet and income statement data—it actually takes a company to pay its suppliers. The fewer the days it takes, the less likely the company is to default on its obligations. To calculate days payables, divide accounts payable by the cost of goods sold for the period in question, then multiply that quotient by 365. Days receivables. A measure that tells you in concrete terms—based on balance sheet and income statement data—how long it actually takes a company to collect what it is owed. A company that takes 45 days to collect its receivables will need significantly more working capital than one that takes four days to collect. To calculate days receivables, divide net accounts receivable for the given time period by net sales, then multiply that quotient by 365. Debt. What is owed to a creditor or supplier. Debt is sometimes referred to as notes payable or bonds payable. Debt to equity. This measure provides a description of how well the company is making use of borrowed money to enhance the return on owner's equity. To calculate the debt-to-equity ratio, divide total debt (long-term debt plus short-term debt plus current maturities) by total shareholders' equity. Depreciation. A way of accounting for the diminishing value of an asset as time goes by. Direct vs. indirect costs. Costs that are directly attributable to the manufacture of a product—for example, the cost of plastic for a bottling company. Direct costs vary in direct proportion to the number of units produced. Indirect costs cannot be directly attributed to a particular product—for example, the cost of machines that are used in the production of more than one product. Dividend. A payment (usually occurring quarterly) to the stockholders of a company, as a return on their investment. |
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