Multiple Choice
ABC Company had \$200,000 in Net Sales and Gross Profit of \$80,000. If Inventory had a balance of \$60,000, what is the company's average days in inventory ratio?
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14. Financial Statement Analysis
Ratios: Average Days in Inventory
Multiple Choice
Which of the following formulas is used to compute the average days in inventory?
A
Average Days in Inventory = Net Sales \(\div\) Inventory Turnover Ratio
B
Average Days in Inventory = 365 \(\div\) Inventory Turnover Ratio
C
Average Days in Inventory = Cost of Goods Sold \(\div\) Average Inventory
D
Average Days in Inventory = Average Inventory \(\div\) Net Sales
Verified step by step guidance1
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.
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