alleryStart learning →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_
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