Day Sales in Inventory Calculation Example Help

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Meaning of Day Sales in Inventory Calculation

 

The days sales in inventory measures the number of days a company holds its inventory before selling. In other words, the days sales in inventory shows the number of days a company’s current stock of inventory will last.
It measures value, liquidity, and cash flows. The days sales in inventory shows how fast the company is moving its inventory. It helps to know how fresh the inventory is.This calculation also shows the liquidity of inventory. Shorter days inventory outstanding means the company can convert its inventory into cash very soon. It also indicates that the more liquid inventory means the company’s cash flows will be better.The formula can be written as follows
 

Days Sales in Inventory = (Inventory at the end/cost of goods sold) x 365
 

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Day Sales in Inventory Calculation Explanation

 

The concept can be well understood with help of an example.
Example: suppose ending inventory is $50000. Cost of goods sold is $150000. Day sales inventory is calculated as
 

Day Sales in Inventory = ($50000/$150000) x 365 = 122 days
This means inventory is turned into cash in next 122 days.
 

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