I calculate the inventory turnover by using the cost of goods sold. I use the cost of goods sold because inventory is in the general ledger at its cost and it is reported on the balance sheet at cost. Since inventory is the cost of goods on hand, it makes sense to relate it to the cost of goods sold.

Assume that during the past year a company's inventory had an average cost of $10,000. (This was the average of the amounts in the asset account Inventory and the average of the amounts reported on the balance sheet during the past year.) Also assume that during the year the company has sales of $60,000 and its cost of goods sold was $40,000. On average, the inventory turned over 4 times ($40,000 of cost of goods sold during the year divided by $10,000 the average cost of goods on hand during the year.)

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