Home › US CMA Part 2 › Financial Management › Using Financial Information and Accounting › How is the inventory turnover ratio calculated?
How is the inventory turnover ratio calculated?
ANet sales divided by the ending inventory
BCost of goods sold over average inventory
CAverage inventory over cost of goods sold
DGross profit divided by average inventory
Answer & Solution
Correct answer: B. Cost of goods sold over average inventory
1. The inventory turnover ratio measures the speed with which inventory moves through the firm and is turned into sales.
2. It is calculated by dividing cost of goods sold by the average inventory.
3. Average inventory is estimated by adding the beginning and ending inventories for the year and dividing by 2.
4. A higher value means stock is moving faster, so inventory is spending less time sitting in the firm.
5. Inverting the fraction would make fast-moving stock look slow, since the number would shrink as sales quickened.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
Related questions
What does a debt-to-equity ratio above 100 percent tell you about who is funding the firm?A bakery reports total liabilities of $70,150 and owners' equity of $78,750. What is its dHow is the debt-to-equity ratio calculated, and which direction is generally better?Why can no single inventory turnover value be called good for every firm?Cost of goods sold was $112,500, beginning inventory was $18,000 and ending inventory was What do activity ratios reflect?A bakery earned a net profit of $32,175 and has 10,000 shares of common stock outstanding.Earnings per share tells an investor what?