Question

Number of days' sales in inventory is calculated as?

1) Sales/Average Daily Cost of Goods Sold
2) Cost of Goods Sold/Average Inventory
3) Sales/365 days
4) Average Inventory/Average Daily Cost of Goods Sold

Answer 1

The number of days' sales in inventory calculation uses the Average Inventory to Average Daily Cost of Goods Sold ratio. The correct option is 4) Average Inventory/Average Daily Cost of Goods Sold. This metric helps businesses understand how long their inventory will last at the current sales rate.

Step-by-step explanation:

The Number of days' sales in inventory is an important metric in business and accounting, which indicates how long a company's current inventory will last based on the rate it's being sold. To calculate this figure, the correct formula to use is Average Inventory/Average Daily Cost of Goods Sold. This formula leverages the average stock a company holds against the daily cost of goods sold, reflecting how efficiently a company is managing its inventory turnover.

The correct option for calculating the number of days' sales in inventory is 4) Average Inventory/Average Daily Cost of Goods Sold.

For instance, if a company has an average inventory worth $10,000 and the average daily cost of goods sold is $1,000, then the number of days' sales in inventory would be 10 days ($10,000/$1,000).