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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following is the correct equation to use when calculating inventory turnover?

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

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

Inventory Turnover = \frac{Operating\ Expenses}{Average\ Inventory}

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

Previous problemNext problem

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: Recall the correct formula for inventory turnover. The formula is: Inventory Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}. This formula is used because 'Cost of Goods Sold' represents the cost of inventory sold during the period, and 'Average Inventory' represents the average amount of inventory held during the same period.

Step 3: Analyze why other formulas provided in the problem are incorrect. For example: \frac{Gross\ Profit}{Average\ Inventory} is incorrect because gross profit does not directly relate to inventory turnover. Similarly, \frac{Operating\ Expenses}{Average\ Inventory} is incorrect because operating expenses are unrelated to inventory management. Lastly, \frac{Net\ Sales}{Ending\ Inventory} is incorrect because net sales do not account for the cost of inventory sold.

Step 4: Ensure you understand the components of the correct formula. 'Cost of Goods Sold' can be found on the income statement, and 'Average Inventory' is calculated as (Beginning Inventory + Ending Inventory) / 2.

Step 5: Apply the correct formula to calculate inventory turnover in practice. Substitute the values for 'Cost of Goods Sold' and 'Average Inventory' into the formula \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory} to determine the inventory turnover ratio.