Which statement correctly reflects how an inventory turn is calculated in the given example?

Which statement correctly reflects how an inventory turn is calculated in the given example?

• A. Purchases divided by ending inventory
• B. Ending inventory divided by purchases
• C. Average inventory divided by purchases
• D. Beginning inventory divided by ending inventory

Answer: (A)

Inventory turnover shows how many times the available inventory is sold and replenished during a period. In the example, they simplify the measure by treating purchases as the cost of goods sold for the period and using ending inventory as the amount left unsold. So, turnover is calculated as purchases divided by ending inventory, which directly indicates how many cycles of sales/depletion occurred relative to what remained at the end. If you plug in numbers, say purchases are 50 and ending inventory is 10, the turnover would be 50 ÷ 10 = 5 times, meaning the inventory turned over five times. The other ways would not reflect turnover in this setup: reversing the ratio would give the inverse, not the actual turnover; using average inventory would be more precise (COGS divided by average inventory) but that requires an average inventory value not provided in this simplified example; and beginning inventory divided by ending inventory isn’t a meaningful turnover measure.

Inventory turnover shows how many times the available inventory is sold and replenished during a period. In the example, they simplify the measure by treating purchases as the cost of goods sold for the period and using ending inventory as the amount left unsold. So, turnover is calculated as purchases divided by ending inventory, which directly indicates how many cycles of sales/depletion occurred relative to what remained at the end.

If you plug in numbers, say purchases are 50 and ending inventory is 10, the turnover would be 50 ÷ 10 = 5 times, meaning the inventory turned over five times.

The other ways would not reflect turnover in this setup: reversing the ratio would give the inverse, not the actual turnover; using average inventory would be more precise (COGS divided by average inventory) but that requires an average inventory value not provided in this simplified example; and beginning inventory divided by ending inventory isn’t a meaningful turnover measure.