Inventory turnover is calculated by dividing the cost of goods sold by the average inventory for the period. This financial metric is crucial for businesses to understand how efficiently their inventory is managed. Higher inventory turnover signifies better inventory management and potentially strong sales.
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing cost of goods sold (COGS) by the average inventory for the period.
Inventory turnover is a key performance metric that indicates how many times a company's inventory is sold and replaced over a specific period. This ratio helps companies understand their inventory efficiency and how well they manage their stock levels compared to sales volume. Typically, higher inventory turnover indicates efficient management and can suggest strong sales, while lower turnover may indicate overstocking or weak sales.
To calculate this ratio accurately, an average inventory value is often used to mitigate the effects of seasonal fluctuations. It is determined by adding the value of the inventory at the beginning of the period to the value at the end of the period, and then dividing by two. This gives a more balanced view of inventory levels over time.