Which formula correctly calculates the Inventory Turnover Ratio (ITOR)?

Which formula correctly calculates the Inventory Turnover Ratio (ITOR)?

• A. = DOH / 365
• B. = Average Inventory / COGS
• C. = COGS / Average Inventory
• D. = Days of Supply / COGS

Answer: (C)

Inventory turnover shows how many times stock is sold and replaced during a period. The correct approach uses cost of goods sold in the numerator because it reflects the actual cost of the inventory that was sold, and it uses average inventory in the denominator to smooth out fluctuations in inventory levels over the period. So the turnover is COGS divided by Average Inventory. To find the average, take (beginning inventory + ending inventory) / 2. For example, if COGS is 600,000 and average inventory is 150,000, ITOR is 4, meaning inventory turned over four times in the period. Other forms aren’t turnover: using the inverse would give a reciprocal, and a days-measure (days on hand or days of supply) describes how long inventory lasts and relates to turnover via DOH = 365 / ITOR.

Inventory turnover shows how many times stock is sold and replaced during a period. The correct approach uses cost of goods sold in the numerator because it reflects the actual cost of the inventory that was sold, and it uses average inventory in the denominator to smooth out fluctuations in inventory levels over the period. So the turnover is COGS divided by Average Inventory. To find the average, take (beginning inventory + ending inventory) / 2. For example, if COGS is 600,000 and average inventory is 150,000, ITOR is 4, meaning inventory turned over four times in the period. Other forms aren’t turnover: using the inverse would give a reciprocal, and a days-measure (days on hand or days of supply) describes how long inventory lasts and relates to turnover via DOH = 365 / ITOR.