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Inventory Turnover Formula

 

Inventory turnover formula helps to calculate inventory turnover ratio. There are few possible ways to calculate inventory turnover that are used in financial practice. You may see the formulas below:

 

First inventory turnover ratio formula:

 

(1) Inventory turnover = Cost of sales / Average inventory


Second inventory turnover ratio formula:

 

(2) Inventory turnover = Sales / Inventory


* ‘Cost of sales’ also can be recognized as ‘cost of goods’ sold or ‘COGS’. Cost of sales or sales can be found in company’s income statement while inventory data are available in balance sheet of the company. To make the calculation more fresh and accurate, data from income statement should include last four quarters and inventory should be calculated as average during that period (average usually is calculated using data from the beginning and end of the period).

 

Both mentioned formulas are used in practice quiet widely. However, the first formula when inventory is compared to ‘cost of sales’ is more accurate because inventory is more related to COGS than to sales, and if gross profit margin is very high, then it will not be very accurate to measure inventory turnover in relation to sales.

 

 






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