How is the Inventory Turnover Ratio calculated?

The Inventory Turnover Ratio is a key metric used to evaluate how effectively a company manages its inventory. It measures the number of times inventory is sold and replaced over a specific period, typically a year. The correct calculation for this ratio is the Cost of Goods Sold divided by Average Inventory.

Using Cost of Goods Sold reflects the expense incurred to produce the goods that were sold during the period, providing a direct link to the sales activities of the company. Average Inventory, on the other hand, accounts for fluctuations in inventory levels over time, offering a more accurate depiction of how inventory is being utilized. This average is typically calculated by taking the beginning inventory and the ending inventory for the period and averaging them.

This method of calculation helps business managers and analysts assess operational efficiency and inventory management effectiveness. High turnover rates might indicate effective management and strong sales, while low turnover rates can signal overstocking, obsolescence, or weak sales.

The other choices do not accurately represent the Inventory Turnover Ratio. For instance, using Ending Inventory instead of Average Inventory can lead to skewed results that do not account for seasonal fluctuations in stock levels. Moreover, ratios that utilize Total Sales or the inverse of Cost of Goods Sold do not align with the standard industry practices for calculating