Final answer:
The two common financial ratios for monitoring inventory levels are the inventory turnover ratio, which indicates the frequency of selling and replacing inventory, and days sales of inventory (DSI), which measures the time it takes to convert inventory to sales.
Step-by-step explanation:
The two common financial ratios for monitoring inventory levels are the inventory turnover ratio and the days sales of inventory (DSI).
The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory value, and helps businesses understand how quickly their inventory is sold and replaced over a certain period. A higher turnover ratio indicates efficient inventory management, suggesting that inventory is sold quickly and there is less chance of inventory becoming obsolete.
The DSI, on the other hand, measures the average number of days it takes to turn the inventory into sales. It is calculated by dividing the ending inventory by the cost of goods sold, then multiplying by 365. A lower DSI indicates a shorter time to convert inventory into cash, which is often seen as positive for cash flow.