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Inventory Turnover Calculation Meaning

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. It calculates the number of times per period a business is able to replace its inventories.Inventory Turnover Ratio depends upon sales and purchases of inventory. Therefore, there must be a coordination between these two components.

The inventory turnover ratio is calculated as the cost of goods sold for a period divided by the average inventory for that period.Inventory turnover ratio is calculated using the following formula

Inventory Turnover = Cost of Goods Sold/Average Inventories
Cost of goods sold = Beginning Inventories + Cost of Goods Manufactured – Ending Inventories
Average Inventories = (Beginning Inventories + Ending Inventories)/2

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Inventory Turnover Calculation Example Explanation

Example: Calculate inventory turnover and days inventories outstanding based on the information given below

Opening inventories $25,000
Closing inventories $30,000
Cost of goods manufactured $245,000

Solution

Cost of goods sold = $25,000 + $245,000 – $30,000 = $240,000

Average inventories = ($25,000 + $30,000) ÷ 2 = $25,500

Inventory turnover ratio = $240,000 ÷ $27,500 = 8.73

Days inventories outstanding = 365 ÷ 8.73 = 41.8

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