This means that ABC Incorporated must restock their inventory approximately 10.5 times per year. Inventory turnover = Cost of Goods Sold / Average Inventory Now that we have these numbers, we can use the formula. A fictitious company reports that Beginning inventory 1,000 Ending inventory 3,000 Cost of Goods Sold (or COGS) 50,000. This means that ABC's average inventory for the year was $19,000. Average Total Assets (Beginning Total Assets + Ending Total Assets) ÷ 2. Total Asset Turnover Ratio Net Sales ÷ Average Total Assets. During that same year, ABC has a beginning inventory of $20,000 and an ending inventory of $18,000. Equation: Inventory Turnover Ratio COGS / Average Inventory Value Example 1 An automotive parts store has a COGS of 500,000 with an average inventory of 10,000. The formula divides the net sales of a company by the average balance of the total assets belonging to the company (i.e., the average between the beginning and end of period asset balances). Let's look at an example to see how it works.ĪBC Incorporated sold $200,000 worth of goods over the course of one year. Taking the average helps to give a more accurate result as inventory levels may vary greatly depending on the month or season. To find this, you can add your beginning inventory and your ending inventory, then divide the sum by two. Average inventory is the average value of inventory that you had on hand during that same period. Inventory Turnover = Cost of Goods Sold / Average InventoryĬost of goods sold simply refers to the total of your sales during the period that you are calculating. You can find your inventory turnover ratio by using the following formula: The number of days in the period typically a fiscal year can then be divided by the inventory turnover ratio to determine the average number of days it takes.
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