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: Average Days in Inventory

Financial Accounting

14. Financial Statement Analysis

Ratios: Average Days in Inventory

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Multiple Choice

Which of the following formulas is used to compute the average days in inventory?

Average Days in Inventory = Net Sales \div Inventory Turnover Ratio

Average Days in Inventory = 365 \div Inventory Turnover Ratio

Average Days in Inventory = Cost of Goods Sold \div Average Inventory

Average Days in Inventory = Average Inventory \div Net Sales

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Verified step by step guidance

Step 1: Understand the concept of 'Average Days in Inventory'. It measures the average number of days inventory is held before being sold, providing insight into inventory management efficiency.

Step 2: Recall the formula for 'Inventory Turnover Ratio', which is typically calculated as: \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \). This ratio is crucial for determining the average days in inventory.

Step 3: Recognize that 'Average Days in Inventory' is derived from the inventory turnover ratio. The formula is: \( \text{Average Days in Inventory} = \frac{365}{\text{Inventory Turnover Ratio}} \). This formula uses 365 days to represent a full year.

Step 4: Compare the given formulas in the problem. The correct formula matches \( \text{Average Days in Inventory} = \frac{365}{\text{Inventory Turnover Ratio}} \), as it directly relates to the inventory turnover ratio and the number of days in a year.

Step 5: Eliminate incorrect options by verifying their components. For example, \( \text{Average Days in Inventory} = \frac{\text{Net Sales}}{\text{Inventory Turnover Ratio}} \) and \( \text{Average Days in Inventory} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \) do not align with the standard formula for calculating average days in inventory.