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Question
The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of day’s sales in inventory. Explain.
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Solution
Inventory Turnover Ratio:
This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio/Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.
The formula for calculating inventory turnover ratio is as follows:
Inventory Turnover Ratio = Cost of Goods SoldAverage Inventory at Cost
Cost of Goods Sold = Opening Stock + Purchase + Direct Expenses – Closing Stock
Alternatively, Cost of Goods Sold = Net Sales – Gross Profit
Average Inventory = Opening stock + Closing Stock2
From the above formula, it is clear that this ratio reveals the average length of time for which the inventory is held by the firm.
This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio/Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.
The formula for calculating inventory turnover ratio is as follows:
Inventory Turnover Ratio = Cost of Goods SoldAverage Inventory at Cost
Cost of Goods Sold = Opening Stock + Purchase + Direct Expenses – Closing Stock
Alternatively, Cost of Goods Sold = Net Sales – Gross Profit
Average Inventory = Opening stock + Closing Stock2
From the above formula, it is clear that this ratio reveals the average length of time for which the inventory is held by the firm.
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