Question

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. What is the inventory turnover?

Answer 1

Answer: The inventory turnover is 2.5

Explanation: Inventory turnover is calculated by dividing the cost of goods sold by the average inventory. It indicates how many times a company sells and restocks its stock of goods during a period.

Therefore, $450,000/ $180,000 = 2.5

Answer 2

Answer:

5.56 times (using sales as numerator), or 2.5 times (using cost of goods sold as numerator)

Explanation:

$Inventory Turnover = \frac{sales}{Average Inventory}$

Average Inventory = (Opening Inventory + Closing Inventory)/2

However, since opening inventory was not given, we can derive it from the Cost of Goods Sold (COGS) formula

COGS = Opening Inventory + Purchases - Closing Inventory.

But, we do not have any figure for purchases, and as such, cannot compute opening inventory.

The proxy for Average Inventory will therefore be Closing inventory.

Thus,

$Inventory Turnover = \frac{1,000,000}{180,000} = 5.56.$

Sometimes, Cost of goods sold is also used instead of sales in computing inventory turnover,

In that case, inventory turnover will be

$\frac{COGS}{average inventory} = \frac{450,000}{180,000} = 2.5 times.$