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All 17 Flashcards — Efficiency ratios
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Question
Two ways to improve stock turnover?
Answer
JIT stock management, promotions to clear slow stock, better demand forecasting, reduce product range.
💡 Hint
JIT + promotions + forecasting
Question
What do efficiency ratios measure?
Answer
How well a business manages its assets and liabilities — specifically stock, debtors and creditors.
💡 Hint
Asset/liability management
Question
Debtor days formula?
Answer
(Trade receivables ÷ Sales revenue) × 365. Lower is better — faster cash collection.
💡 Hint
Receivables ÷ revenue × 365
Question
Stock turnover (times) formula?
Answer
Cost of goods sold ÷ Average stock. Higher = stock sells faster.
💡 Hint
COGS ÷ avg stock
Question
Stock turnover: higher = ___. Debtor days: lower = ___. Creditor days: higher = ___
Answer
Better (faster sales); better (faster collection); keeps cash longer (but respect suppliers).
💡 Hint
Better, better, longer
Question
Creditor days formula?
Answer
(Trade payables ÷ COGS) × 365. Higher keeps cash longer — but don't upset suppliers.
💡 Hint
Payables ÷ COGS × 365
Question
Efficiency ratios measure the ___ of money flowing through the business
Answer
Speed — faster is usually better.
💡 Hint
Speed
Question
Stock turnover (days) formula?
Answer
(Average stock ÷ COGS) × 365. Lower days = stock doesn't sit around long.
💡 Hint
Avg stock ÷ COGS × 365
Question
Two ways to reduce debtor days?
Answer
Early payment discounts, tighten credit terms, chase overdue invoices, use factoring.
💡 Hint
Discounts + chase + factoring
Question
If debtor days are high and liquidity is low — the connection is ___
Answer
Cash is stuck with customers who haven't paid — directly causing the liquidity problem.
💡 Hint
Cash stuck with debtors
Question
How to manage creditor days?
Answer
Negotiate longer terms with suppliers, but always pay within agreed terms to maintain relationships.
💡 Hint
Longer terms + keep relationships
Question
COGS $200k, avg stock $25k. Stock turnover?
Answer
$200k ÷ $25k = 8 times/year. Days: ($25k ÷ $200k) × 365 = 46 days.
💡 Hint
8 times, 46 days
Question
Always compare ratios ___ and against ___
Answer
Over time (trends) and against industry norms (benchmarks).
💡 Hint
Time + industry
Question
Three efficiency ratios to know?
Answer
Stock turnover, debtor days, creditor days.
💡 Hint
Stock, debtors, creditors
Question
Receivables $40k, revenue $400k. Debtor days?
Answer
($40k ÷ $400k) × 365 = 37 days.
💡 Hint
37 days
Question
Ideal: creditor days ___ debtor days. Why?
Answer
Greater than — collect from customers BEFORE paying suppliers = free cash flow.
💡 Hint
Creditor > debtor
Question
Supermarkets have ___ stock turnover; jewellers have ___
Answer
Very high (fast-selling perishables); low (expensive slow-moving items) — context matters!
💡 Hint
High vs low
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Full study notes for Efficiency ratios
Topic 3.6 hub
Efficiency ratios (HL only)
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