It shows how fast a company can replace a current period batch of inventories and transform it into sales to find a balance that is right for your business. The inventory turnover ratio and an efficient ratio formula are important. The Inventory Turnover Ratio Formula helps you find a balance that is right for your business and will lead to making a profit in business. Read Inventory Valuation to know the different valuation methods and calculations with examples.Start Your Free Investment Banking Courseĭownload Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others Inventory Turnover Ratio Formula
Inventory Turnover Ratio = Cost of goods sold / Average Inventory To calculate the inventory turnover ratio, let’s apply the formula we discussed. Now that we have understood the inventory turnover ratio formula, let’s calculate it by considering an example. So average inventory is 1,50,000 (1,25,000 + 1,75,00/2) Example of inventory turnover ratio 1,25,000 and value of inventory at the end of the period is Rs. Formula to calculate average inventoryĪverage inventory is calculated using the below formulaįor example, inventory at the beginning of the year is Rs. As the name suggests, it is calculated by arriving an average of stock at the beginning and end of the period. 1,20,000 Average inventory and its formula.Īverage inventory is an estimated amount of inventory that a business has on hand over a longer period. So the cost of goods sold in this case should be calculated as below.Ĭost of goods sold = Revenue from operations + Gross loss Let’ say finished goods worth of 1,20,000 was sold for Rs. Then, in that case, the cost of goods sold is derived by adding the gross loss to the cost of goods sold. There may also be a case where you may incur a loss on sale of inventory. Here, 1,00,000 (revenue – gross profit) is nothing but the cost of goods sold derived by unloading the profit margin from the sales. This is because net profit includes indirect expenses that cannot be attributed to an inventory.Ĭonsidering the above example, our revenue from operations is Rs. To simply put, reducing profit from sales. How to derive the value of Cost of goods sold?Ĭost of goods sold is derived simply by reducing the profit from the revenue generated. 1,00,000 is your cost of inventory or cost of goods sold. 1,20,000 is the revenue generated from the operations and Rs. So, the cost of sales is the actual value of inventory which has been converted into sales.įor example, finished goods worth Rs 1,00,000 was sold for Rs. Revenue from operations means your sales. Here, Cost of goods sold is nothing but the cost of revenue from operations. Inventory Turnover Ratio = Cost of goods sold / Average inventoryīefore we apply the above formula, let’s understand the cost of goods sold, average inventory and how to determine these. Formula to calculate inventory turnover ratio In simple words, the number of times the company sells its inventory during the period. Inventory turnover ratio explains how much of stock held by the business has been converted into sales.
It is also called a stock turnover ratio. Inventory turnover ratio is an accounting ratio that establishes a relationship between the revenue cost, more commonly known as the cost of goods sold and average inventory carried during the period. Why inventory turnover ratio is important?.Formula to calculate inventory turnover ratio.