Flour on the shelf: Every night from 2 a.m. Priti's bakers at Mill Lane turn flour, butter and yeast into about 1,200 loaves. The flour arrives from Valley Grain in sacks and waits in the store until it is used.
A sack in the store is money Lena has already spent and cannot spend again until it comes back as bread sold. The faster the store empties and refills, the less money sits on the shelf.
How well a business uses what it holds, and how fast money moves through it, is measured with efficiency ratios. This micro has three of them. The first asks how many times in a year the business sells its stock and buys it again (stock turnover).
Stock turnover (number of times) = cost of sales ÷ average stock
Average stock = (opening stock + closing stock) ÷ 2
The same ratio can also be given as the number of days an item waits before it is used or sold:
Stock turnover (number of days) = average stock ÷ cost of sales × 365
All three formulas are on the formulae sheet you have in the exam.
Lena's Bakery Ltd, year ended 31 December 2025
Average stock: $15,000
Stock was $15,000 on 1 January 2025 and $15,000 on 31 December 2025.
($15,000 + $15,000) ÷ 2 = $15,000
In times: 32 times
$480,000 ÷ $15,000 = 32 times.
The bakery used up and replaced its whole stock 32 times in the year.
In days: 11.41 days
$15,000 ÷ $480,000 × 365 = 11.41 days.
On average, flour and ingredients wait about 11 days in the store before they go into the ovens.
Times or days: the same stock, upside down: 32 times and 11.41 days describe the same flour. In times, a higher number is faster. In days, a lower number is faster.
So read which one the question asks for, and write the unit after the number: '32 times' or '11.41 days'. A bare 32 could be either.
What counts as fast depends on what is sold. Bread goes stale in a day and flour keeps for weeks, so a bakery turns its stock over far more often than a furniture shop, whose sofas can sit for months. Compare a ratio with the same business last year, or with a business that sells the same things.
A question can also work backwards. Suppose Lena wanted 40 times in 2026, with cost of sales the same. Average stock would have to be $480,000 ÷ 40 = $12,000. Opening stock is $15,000, so ($15,000 + closing stock) ÷ 2 = $12,000, and closing stock = 2 × $12,000 − $15,000 = $9,000.
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The cafés pay later: Most of the bakery's customers pay at the counter. But cafés and hotels buy bread wholesale: the van leaves Mill Lane at 5 a.m., the bread is delivered, and an invoice follows. They have 30 days to pay (they buy on credit).
On 31 December 2025 these customers still owed the bakery $40,000.
Customers who have bought on credit and not yet paid are the business's debtors. The debtor days ratio is the average number of days customers take to pay.
Debtor days (number of days) = debtors ÷ total sales revenue × 365
Total sales revenue stands in for credit sales, because most accounts do not show the two apart.
Lena's Bakery Ltd, 2025
The two figures
Debtors $40,000 from the balance sheet. Sales revenue $1,600,000 from the profit and loss account (3.4.1).
Divide, then times 365
$40,000 ÷ $1,600,000 × 365 = 9.125, so 9.13 days.
What it says
On average the bakery waits about nine days for its money after a sale.
An average can hide the slow payers: Nine days looks quick. But the counter customers pay at once, and only the wholesale sales, $240,000 of the $1,600,000, are on credit. Worked out on those alone, $40,000 ÷ $240,000 × 365 = 60.83 days: twice the 30 days the cafés and hotels were given.
In a calculation, use the sales revenue the question gives. In a comment, ask who the customers are and what credit they were offered.
| What you see | What it suggests |
|---|---|
| Debtor days fall | Customers pay sooner, so cash comes in faster |
| Debtor days rise | Customers are slower to pay, or the business is giving longer credit to win sales |
| Debtor days above the credit period offered | Some customers pay late, and the business is waiting for cash it has already earned |
| Different figures for different customers | Look at the biggest customer group first: its figure moves the total most |
Why it matters: a credit sale counts as revenue the day the bread is delivered, but the cash arrives only when the café pays. Until then the bakery has made the sale and still has to find the money for flour and wages.
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The bakery is a customer too: Valley Grain, the farmers' cooperative, delivers flour to Mill Lane and sends its invoice. The bakery agreed to pay 30 days after delivery.
On 31 December 2025 the bakery owed its suppliers $45,000, most of it to Valley Grain.
Suppliers the business owes for goods bought on credit are its creditors. The creditor days ratio is the average number of days the business takes to pay them.
Creditor days (number of days) = creditors ÷ cost of sales × 365
Cost of sales stands in for credit purchases, the goods bought from suppliers. Notice the pairs: debtors go with sales revenue, creditors go with cost of sales.
Lena's Bakery Ltd, 2025
The two figures
Creditors $45,000 from the balance sheet. Cost of sales $480,000 from the profit and loss account.
Divide, then times 365
$45,000 ÷ $480,000 × 365 = 34.219, so 34.22 days.
Against the terms
Valley Grain gave 30 days. On average the bakery pays about four days late.
| Money in: debtor days | Money out: creditor days | |
|---|---|---|
| Lena's Bakery, 2025 | 9.13 days | 34.22 days |
| Who waits | The bakery waits for its customers | Valley Grain waits for the bakery |
| Good for the bakery's cash when | The number is low | The number is high |
| Read together | Cash comes in about 25 days before it goes out | A cushion of about 25 days |
Paying later is not free: A higher creditor days figure keeps cash in the bakery for longer. But paying later than agreed tells Valley Grain that the bakery is a slow payer.
A supplier kept waiting can refuse credit and ask for cash on delivery, raise its prices, or put other customers first when flour is short. Valley Grain is a cooperative of farmers who need the money too.
Lena's accountant puts three numbers in front of her: stock turnover 32 times, debtor days 9.13, creditor days 34.22. Each can be moved, and each move costs something.
Improving means: stock turnover up in times (down in days), debtor days down, creditor days up, without harming the business.
Stock turnover: sell stock faster
- Order smaller amounts more often, so less flour waits in the store
- Stop making slow-selling lines and stock only what sells
- Sell off old or slow stock at a lower price
- Have supplies delivered close to when they are needed
Debtor days: get paid sooner
- Offer a small discount for paying early
- Check a customer's record before giving credit
- Shorten the credit period, from 30 days to 14
- Chase late payers, and stop deliveries to customers who do not pay
Creditor days: pay later
- Agree a longer credit period with suppliers, from 30 days to 45
- Pay on the last agreed day, not before
- Buy from suppliers that give longer credit
| Strategy | Effect on the ratio | The drawback |
|---|---|---|
| Smaller, more frequent flour orders | Stock turnover rises in times | Bulk discounts are lost, delivery costs rise, and a late van means no flour at 2 a.m. |
| Sell off slow stock cheaply | Stock turnover rises | Less profit on every item sold off |
| Discount for early payment | Debtor days fall | The bakery receives less for each sale paid early |
| Shorter credit period or credit checks | Debtor days fall | Cafés and hotels may buy from a baker who gives longer credit |
| Longer credit from Valley Grain | Creditor days rise | Valley Grain may refuse, or raise its prices in return |
| Paying later than agreed | Creditor days rise | Goodwill is lost; the supplier may demand cash on delivery |
Judge the strategy in its case: A strategy is only good for a business that can bear its drawback. The bakery already turns its stock 32 times a year, and running out of flour stops the ovens, so cutting stock further is risky.
The wholesale customers, at about 61 days against 30 days' credit, are where the money is waiting. An early-payment discount or firmer chasing fits the bakery better.
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How this comes up: Mostly as calculations from a table of final accounts, for one or two marks each: stock turnover in times or in days, debtor days, creditor days. One mark says 'no working required'; two marks say 'show all your working', and the working counts as well as the answer.
Some parts add a step: find average stock, sales revenue from units × price, or creditors from a percentage; or work backwards to the closing stock that gives a target ratio.
Then short written parts: explain the impact of a planned change on one efficiency ratio, or comment on debtor days data, for two marks.
The two-mark calculation
- Write the formula the way the formulae sheet gives it.
- Find any missing figure first, and show it: average stock, sales revenue, creditors.
- Put the numbers in, with $ signs.
- Give the answer with its unit, times or days, to two decimal places.
Two traps: Times when days were asked. Cost of sales ÷ average stock gives times. Days need average stock ÷ cost of sales × 365. Check the question's wording before you divide.
Closing stock for average stock. If opening and closing stock are both given, average them first and write that line down. The pairs matter too: debtors with sales revenue, creditors with cost of sales.
Using the information in the table, calculate Goldcrust plc's stock turnover (number of days) ratio for 2025 (show all your working).
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