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General Accounting Discussions: Question on Inventory Ratios. -Month Supply vs Inventory Turn

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    • CommentAuthorstumpo77
    • CommentTimeJun 9th 2007
     
    Does any one know the benefit of calculating inventory "month supply" vs the "turn ration"?

    Month supply is calculated by using the current inventory balance at month end then dividing by the YTD avg of cogs sold. This does give a true estimated "supply" of inventory using your on hand balance and avg cogs sold as a divisor. But it is the complete opposite of what I was shown in school which was to use the average inventory divided by the ytd COGS.

    The tutn calculation gives a true representation of how many times inventory turns over vs how much supply is on hand at a given time. I can't think of a logical reason to use the former over the traditonal turn ratio. I think the traditional turn ration is more usefull. Can anyone give me good reason to think otherwise before I go to my boss and ask him to change our month end reporting package.
    • CommentAuthoradaclarke
    • CommentTimeJun 19th 2007
     
    The school teaches you ratios based on financial statements, for instant if the user of the financial statement wanted to determine a companies inventory turnover ratio, they have to use whats in front of them, the companies annual report for two consective years at year-end. So, the ratios we learned at school is for external purposes, the ratio you are using is for internal purposes. If your boss needs an accurate account of inventory you may want to use your ratio, if your boss wants to get the same picture the users of the financial statement has you should use the traditional one.

    Hope I answered your question!
  3.  
    I agree with the adaclarke point of view!
  4.  
    Adaclarke you done a very good job!
    Very good explained here!

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