Home – New Forums Money matters The Definition of “Average” Reply To: The Definition of “Average”

#1157833
James Millar
Participant
  • Total posts: 1,739
Up
0
::
Calcul8or, post: 182036 wrote:
Can I ask anyone (accounting, business or commerce minded) out there to help me with a problem I’ve been struggling with for the last few hours please?

I’ve been researching “Receivables Turnover Ratio”, which involves finding the AVERAGE Accounts Receivables over a period of time. All of the examples I’ve seen sum the first and last (opening and closing) AR balances and divide that by two and call it the average!!!

However, every test I’ve done shows a MASSIVE gap between the actual average, of lets say monthly AR over 12 months, and the amount calculated in the way described above.

The more I read, the whackier it gets. Loads of sites think the opening/closing method is a reliable way of calculating average inventory. Only one I’ve found so far (EHow, believe it or not! link below) says that this method should only be used for inventory levels that do not fluctuate much over time.

Now the question I have if this is the case, is if inventory doesn’t fluctuate much, why even bother adding and dividing? Why not just take either of the values and use that as your average?

eg (5 + 5)/2 = 5

It would have been easier just to take either 5.

This is a ridiculous method as far as I’m concerned, and the fact that it seems to be so widely used just shocks me to tears!

How can so many “experts” be wrong?….or is it me?

http://www.ehow.com/how_5070892_calculate-average-inventory.html?ref=Track2&utm_source=ask

I’m not sure what ratio’s you are looking at but generally “days” turnover of debtors or stock tends to be an important ratio. A simple average between start and end of financial year may be less useful data.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900