HTML Preview Manufacturing Company Inventory List page number 1.
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Reality Check –
Computing Inventory Turnover
InventoryAverage
COGS
TurnoverInventory =
2/)622,214,1164,060,1(
646,172,1
+
=
03.1
=
Hint: See page 5-7 for financial statement data.
Inventory Turnover
The inventory turnover ratio is a common measure of the firm’s operational efficiency in
the management of its assets. As noted earlier, minimizing inventory holdings reduces
overhead costs and, hence, improves the profitability performance of the enterprise.
Ideally the inventory turnover ratio would be calculated as units sold divided by units on
hand. However, the financial statements themselves will only capture monetary
valuations and hence external evaluation of inventory turnover must rely on the valuation
metrics recorded under GAAP, namely:
While it is
theoretically superior to
average the “snapshot”
balance sheet amounts of
inventory in order to
benchmark Cost of Goods
Sold for the entire year,
some analysts simply
utilize the ending inventory
number for computational
expediency – a minor
inaccuracy for firms with
relatively static year-to-year inventory levels.
The inventory turnover ratio is often interpreted as a measure of the number of
times that the company sold through its inventory during the year. Thus, for example, an
inventory turnover ratio of 4.0 indicates that the company sells through its stock of
inventory each quarter – in other words, there is a three month supply of inventory on
Inventory Turnover
()
/2InventoryEndingInventoryBeginning
SoldGoodsofCost
InventoryAverage
SoldGoodsofCost
+
=