Course Outline
Join PRO

What is the inventory turnover ratio?

Author:
Harold Averkamp, CPA, MBA

Definition of Inventory Turnover Ratio

The inventory turnover ratio is an important financial ratio that indicates a company’s past ability to sell its goods. Converting inventory into cash is critical for a company to pay its obligations when they are due.

How to Calculate the Inventory Turnover Ratio

The calculation for the inventory turnover ratio is: cost of goods sold for a year divided by average inventory during the same 12 months.

A higher inventory turnover ratio is viewed as better than a lower ratio.

Note: The cost of goods sold is used (not sales) in calculating the inventory turnover ratio because the company’s inventory is recorded and reported at its cost (not at its selling prices). However, be cautioned that some people will use sales and therefore will be overstating the inventory turnover ratio. It is also important to use the average amount of inventory throughout the entire year since using only the end-of-the-year amounts may result in a much lower average.

Example of Inventory Turnover Ratio

To illustrate the inventory turnover ratio, let’s assume that during the most recent year a company’s cost of goods sold was $3,600,000 and the average cost of its inventory account during the year was $400,000. As a result, the company’s inventory turnover ratio is: cost of goods sold of $3,600,000 divided by average inventory of $400,000 = 9 times during the recent year. This could be compared to the company’s ratio in previous years and to other companies in the same industry.

Even with a favorable inventory turnover ratio, a company may have some excess and obsolete inventory items. Therefore, it is wise to compare the quantity of each item in inventory to the quantity of each item sold during the past year.

Join PRO to Track Progress

Features

Free

PRO

Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Dictionary
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Flashcards
Crossword Puzzles
Word Scrambles with Coaching
Bookkeeping Study Guide
Managerial and Cost Accounting Study Guide
Certificates of Achievement
Bookkeeping Certificate of Excellence
Business Forms
Printable PDF Files
Progress Tracking
Motivational Badges and Points
Motivational Medal Rankings
Motivational Activity Streaks
Public Profile Page of Achievements

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Read 3,033 Testimonials

PRO for Teams
  • Convert your existing PRO account to a "Team" account for free
  • Easily add new PRO users and admins to your team
  • Monitor team progress, average grades, recent activity, achievements, and more
PRO for Teams
Take the Tour Join Pro Upgrade to Pro