ACCA Financial Management (F9) Certification Practice Exam

What do Finished Goods Days represent in inventory management?

1. (Finished Goods / Cost of Sales) x 365

2. (Cost of Sales / Finished Goods) x 365

3. (Finished Goods / Average Inventory) x 365

4. (Cost of Goods Sold / Finished Goods) x 365

The correct answer is: (Finished Goods / Cost of Sales) x 365

Finished Goods Days is an important metric in inventory management that indicates the average number of days it takes for a company to sell its finished goods inventory. The formula used to calculate Finished Goods Days is derived from the relationship between finished goods inventory and the cost of sales. By using the formula (Finished Goods / Cost of Sales) x 365, you essentially determine how much inventory is available in relation to the company's sales activity over the course of a year. This calculation allows businesses to understand how efficiently they are managing their finished goods inventory. A lower number of Finished Goods Days suggests that a company is selling its inventory quickly and efficiently, while a higher number might indicate overstocking or slower sales. This metric is particularly useful for businesses that rely on just-in-time inventory practices or those seeking to optimize their inventory turnover to enhance cash flow and reduce holding costs. It gives insight not only into sales performance but also into inventory management effectiveness. The other formulas provided relate to inventory or sales metrics but do not correctly represent the concept of Finished Goods Days as they either mix up components or take the inverse relationship, leading to different interpretations of inventory efficiency. Using the correct formula ensures clarity in measuring how well a company turns its finished goods into sales over time.