Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Inventory Turnover

Financial Accounting

14. Financial Statement Analysis

Ratios: Inventory Turnover

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Multiple Choice

Which of the following is the formula used to calculate inventory turnover?

Inventory Turnover = \frac{Average\ Inventory}{Cost\ of\ Goods\ Sold}

Inventory Turnover = \frac{Net\ Sales}{Ending\ Inventory}

Inventory Turnover = \frac{Gross\ Profit}{Average\ Inventory}

Inventory Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}

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Verified step by step guidance

Step 1: Understand the concept of inventory turnover. Inventory turnover measures how efficiently a company manages its inventory by calculating how many times inventory is sold and replaced during a specific period.

Step 2: Identify the correct formula for inventory turnover. The formula is: Inventory Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}. This formula highlights the relationship between the cost of goods sold (COGS) and the average inventory held during the period.

Step 3: Break down the components of the formula. 'Cost of Goods Sold' represents the direct costs attributable to the production of goods sold by the company. 'Average Inventory' is calculated as the average of the beginning and ending inventory for the period.

Step 4: Analyze why the other formulas provided are incorrect. For example, \frac{Net\ Sales}{Ending\ Inventory} does not account for the cost of goods sold, which is essential for inventory turnover. Similarly, \frac{Gross\ Profit}{Average\ Inventory} is unrelated to inventory turnover as it focuses on profitability rather than inventory management.

Step 5: Apply the correct formula to calculate inventory turnover in practice. Gather the values for Cost of Goods Sold and Average Inventory from the financial statements, substitute them into the formula, and perform the calculation to determine the inventory turnover ratio.