Inventory Turnover is calculated as which formula?

Inventory Turnover is calculated as which formula?

• A. Beginning Inventory / Ending Inventory
• B. Net Sales / Average Inventory
• C. Cost of Goods Sold / Average Inventory
• D. Average Inventory / Cost of Goods Sold

Answer: (C)

Inventory turnover measures how efficiently a company sells and replenishes its stock over a period. The best way to capture this is by comparing the cost of the inventory actually sold to the average amount of inventory on hand during the period. Using Cost of Goods Sold in the numerator reflects the expense tied to the sold inventory, while using Average Inventory in the denominator smooths out seasonal swings by averaging what was on hand at the start and end of the period. Average Inventory is computed as (Beginning Inventory + Ending Inventory) / 2. The other formulas don’t reflect this idea: Beginning Inventory divided by Ending Inventory isn’t a turnover measure; Net Sales divided by Average Inventory uses revenue rather than the cost of goods sold, which changes the meaning; and Average Inventory divided by Cost of Goods Sold is the reciprocal of turnover, giving a measure related to how many periods’ worth of inventory is on hand, not how many times inventory is sold.

Inventory turnover measures how efficiently a company sells and replenishes its stock over a period. The best way to capture this is by comparing the cost of the inventory actually sold to the average amount of inventory on hand during the period. Using Cost of Goods Sold in the numerator reflects the expense tied to the sold inventory, while using Average Inventory in the denominator smooths out seasonal swings by averaging what was on hand at the start and end of the period. Average Inventory is computed as (Beginning Inventory + Ending Inventory) / 2.

The other formulas don’t reflect this idea: Beginning Inventory divided by Ending Inventory isn’t a turnover measure; Net Sales divided by Average Inventory uses revenue rather than the cost of goods sold, which changes the meaning; and Average Inventory divided by Cost of Goods Sold is the reciprocal of turnover, giving a measure related to how many periods’ worth of inventory is on hand, not how many times inventory is sold.