13RQ - Horngren'S Financial And Managerial Accounting

Question

How is inventory turnover calculated, and what does it measure?

Step-by-Step Solution

Answer

Inventory turnover is calculated to measure the number of times inventory is converted to sale by comparing the cost of sold inventory against average inventory. 

Inventory turnover

Inventory turnover is the ratio between the cost of goods sold and average inventory. It is computed in the following way –

$$\begin{gathered} \mathbf{\text{Inventory turnover = }}\frac{\mathbf{\text{Cost of goods sold}}}{\mathbf{\text{Average Inventory}}} \\ \mathbf{\text{Average Inventory =}}\frac{\mathbf{O}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{ }\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{+}\mathbf{C}\mathbf{l}\mathbf{o}\mathbf{sin}\mathbf{g}\mathbf{ }\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}{\mathbf{2}} \end{gathered}$$

Inventory turnover measurement

Inventory turnover measures the number of times inventory is sold during a particular period. This is computed by comparing the sold inventory against the average inventory for the period.