Measure financial efficiency
Calculate inventory turnover, receivables days and payables days with Cambridge formulas and assess efficient but sustainable working-capital choices.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 10.2.3. Ratio calculations use the formulae listed in the relevant Cambridge syllabus. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Read the figures, dates and assumptions supplied in the question before calculating or interpreting an accounting result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How does Cambridge calculate the rate of inventory turnover in times?
What you will learn
- Explain financial efficiency in working-capital use
- Calculate the three prescribed efficiency ratios
- Interpret results and evaluate improvement methods
Use the specified base and units
Rate of inventory turnover (times) = cost of sales ÷ average inventory. Trade receivables turnover (days) = trade receivables ÷ credit sales × 365. Trade payables turnover (days) = trade payables ÷ credit purchases × 365.
Use credit sales and credit purchases when the question provides them; do not substitute total revenue or all purchases without justification. Keep values on the same time basis and state days or times as appropriate.
Balance efficiency with continuity
Faster inventory turnover may release cash and reduce storage or obsolescence, but too little stock can cause lost sales or production stops. Fewer receivable days may improve cash flow, but strict credit can lose customers. Longer payables days conserve cash temporarily but can harm suppliers or forfeit discounts.
Compare like periods and businesses, and consider seasonality, product shelf life, supplier terms and customer mix. A change can be favourable for cash but harmful to reliability or profitability; explain the trade-off.
Pause and explain
Cost of sales is $240,000 and average inventory is $40,000. What is inventory turnover?
Worked example
A manufacturer has cost of sales $360,000, average inventory $60,000, trade receivables $30,000, credit sales $300,000, trade payables $24,000 and credit purchases $240,000. Calculate all three ratios.
Show the worked solution
- Inventory turnover=360,000÷60,000=6 times.
- Receivables days=30,000÷300,000×365=36.5 days.
- Payables days=24,000÷240,000×365=36.5 days.
Answer Inventory turns over 6 times; receivables turnover is 36.5 days; payables turnover is 36.5 days.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Trade receivables are $18,000 and annual credit sales are $180,000. Calculate receivables turnover in days.
Give me a hint
Divide receivables by credit sales and multiply by 365.
Compare my reasoning
- 18,000÷180,000=0.1.
- 0.1×365=36.5 days.
- State the result in days.
Trade receivables turnover is 36.5 days.
Look for these in your work
- Correct credit-sales base is used
- 365 is applied
- Answer is expressed in days
Inventory turnover rises from 4 to 7 times after a business reduces safety stock. Explain one possible benefit and one risk.
Give me a hint
Connect turnover to cash and storage, then consider service and supply uncertainty.
Compare my reasoning
- Higher turnover can reduce cash tied up and storage/obsolescence costs.
- Lower safety stock may increase the risk of a stockout.
- Check demand variability and supplier reliability before deciding the new buffer is suitable.
The faster turnover may release cash and reduce storage or obsolescence. However, less safety stock can cause missed sales or production delays if demand spikes or suppliers are unreliable. The business should test service levels and forecast accuracy, not maximise turnover blindly.
Look for these in your work
- Cash/stock benefit is explained
- Stockout risk is concrete
- Decision is contextual
A firm wants to extend payables days from 30 to 60 to preserve cash. Assess the proposal using its likely supplier and cost effects.
Give me a hint
A longer period can delay cash outflow, but compare agreed terms and supply consequences.
Compare my reasoning
- Cash remains available for longer in the short term.
- Late payment may strain suppliers or threaten supply.
- Check negotiated terms, early-payment discounts, interest/fees and criticality of inputs.
Agreed longer terms may reduce immediate cash pressure, but unnegotiated delay can damage supplier trust, remove discounts, add charges or interrupt inputs. The firm should compare those costs with the value of cash retained and negotiate transparently, especially with critical suppliers.
Look for these in your work
- Cash timing is identified
- Supplier and discount costs are assessed
- Recommendation includes a condition
Common mistakes
- Using closing inventory instead of average inventory when average is given
- Multiplying the turnover-times ratio by 365
- Assuming the shortest payment time is always best
What can you explain now?
How does Cambridge calculate the rate of inventory turnover in times?
Compare with the explanation
Cost of sales divided by average inventory
The result is a number of stock turns for the period.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Which base and unit belong to each efficiency measure, and how could a faster result create a different risk?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.