# Inventory turnover ratio

Inventory turnover ratio (ITR) is an activity ratio and is a tool to evaluate the liquidity of company’s inventory. It measures how many times a company has sold and replaced its inventory during a certain period of time.

## Formula:

Inventory turnover ratio is computed by dividing the cost of goods sold by average inventory at cost. The formula/equation is given below: Two components of the formula of inventory turnover ratio are cost of goods sold and average inventory at cost. Cost of goods sold is equal to cost of goods manufactured (purchases for trading company) plus opening inventory less closing inventory. Average inventory is equal to opening balance of inventory plus closing balance of inventory divided by two.

Note for students: If cost of goods sold is unknown, the net sales figure can be used as numerator and if the opening balance of inventory is unknown, closing balance can be used as denominator. For example if both cost of goods sold and opening inventory are not given in the problem, the formula would be written as follows:

Inventory turnover ratio = Sales / Inventory

## Example 1:

Compute the inventory turnover ratio and average selling period from the following data of a trading company:

• Sales: \$75,000
• Gross profit: \$35,000
• Opening inventory: \$9,000
• Closing inventory: \$7,000

### Solution:

\$40,000* / \$8,000**

5 times

Computation of cost of goods sold and average inventory:

*\$75,000 – \$35,000 = \$40,000
**(\$9,000 + \$7,000) / 2

Average selling period is computed by dividing 365 by inventory turnover ratio:

365 days / 5 times

73 days

The company will take 73 days to sell average inventory.

## Significance and Interpretation:

Inventory turnover ratio vary significantly among industries. A high ratio indicates fast moving inventories and a low ratio, on the other hand, indicates slow moving or obsolete inventories in stock. A low ratio may also be the result of maintaining excessive inventories needlessly. Maintaining excessive inventories unnecessarily indicates poor inventory management because it involves tiding up funds that could have been used in other business operations.

Users must also observe various factors that can effect inventory turnover ratio (ITR) before interpreting or making any decision. For example, companies using FIFO cost flow assumption may have a higher ITR in the days of inflation because the latest inventory purchased at higher prices remain in the stock under FIFO. On the other hand, companies using LIFO cost flow assumption may have comparatively lower ITR than others because the oldest inventory purchased at comparatively lower prices remain in the stock under LIFO.

Another factor that could influence this ratio is the use of just-in-time inventory method. Companies using just in time system of inventory management usually have high inventory turnover ratio as compared to others in the industry.

## Example 2

The ITM trading company provides you the following data for the year 2016:

• Inventory turnover ratio: 12 times
• Opening inventory at cost: \$36,000
• Closing inventory at cost: \$54,000

Calculate cost of goods sold for the year 2016.

### Solution

Inventory turnover ratio = Cost of goods sold/Average inventory at cost

12 times = Cost of goods sold/\$45,000*

Cost of goods sold = \$45,000 × 12 times

= \$540,000

*(\$36,000 + \$54,000)/2

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### 51 Comments on Inventory turnover ratio

1. I have difficulty and need your help in solving the following problem:

A company earned a net profit of \$212,000 before interest and tax. Total operating expenses for the year were \$12,000. The opening stock was \$12,000 and the closing stock was \$4,000 higher than the opening stock. The goods are sold to make a gross profit of 50% on original cost.

Required:

(1). Calculate the amount of total goods purchased during the period.
(2). Calculate stock/inventory turnover ratio of the company.
(3). Calculate average selling period. Assume 360 days in a year.

1. Debabrata Mukherjee

Opening stock =92,800, Purchases=7,74,400
Sales=10,24,000
Gross Profit =25% on sales
Calculate the “Stock Turn over Ratio”
??

1. Swarnali Sarkar

GP=1024000×25/100 = 256000
cost of RFO=1024000 -256000 =768000
Closing inventory=opening inventory + purchase=92800+774400=867000
Average Inventory=closing inventory + opening inventory/2
=867200+92800/2
=480000
ITR = cost of RFO/Average inventory
=768000/480000
=1.6 times

Hopefully this answer is correct..

2. Sakshi:)

COGS= SALES-GP
= (1024000)-( 25/100 *1024000)
= 768000
Since closung stock isnt given so u can take opening stock in place of average inventory.
Now, inventory turnover ratio =
cogs/average inventory

= 768000/92800
Stock turnover ratio = 8.28times

2. Accounting For Management

You need to compute cost of goods sold and average stock first. These figures can be computed as follows:

Gross profit
= Net profit before interest and tax + Operating expenses
= \$212,000 + \$12,000
= \$224,000

Since the company sells goods at 50% above their original cost, the cost of goods sold can be computed as follows:

Sales
= \$224,000 / 0.5
= \$448,000

Cost of goods sold
= \$448,000 – \$224,000
= \$224,000

Average stock or inventory:
= (\$12,000 + \$16,000)/2 = \$14,000

(1). Purchases made during the year:
= (Cost of goods sold + closing stock) – Opening stock
= (\$224,000 + \$16,000) – \$12,000
= \$228,000

(2). inventory turnover ratio (ITR):
= \$224,000 / \$14,000
= 16 times

(3). Average selling period:
= No. of days in a year / ITR
= 360/16
= 22.50 days

3. May

pls. compute…and help….
quantity=12
unit cost=18.00
total cost=?
selling price (x15%)
NO. OF ITEMS SOLD=8
TOTAL COST PRICE=?
TOTAL SALES=?
PROFIT=?
ITEMS LEFT=?

4. Accounting For Management

Sorry May but the information you have provided is not complete. For example, quantity = 12, what quantity is it? Is it quantity purchased during the period?

Please give us full information after then we will be able to solve it for you.

5. Mariz Rose

how will you compute the inventory turnover ratio if the inventory is unknown. There is no inventory account in the balance sheet. what does it mean. help please.

6. najwa shaaban

Please i need help to solve this..

Inventory 1/1: 15000 units , \$10 Per Unit
Purchases:
April 6: 14000 units , \$12 Per Unit
July 23: 11000 units , \$14 Per Unit
Oct 22: 10000 units , \$15 Per Unit
Sales during the year:
May 15: 38000 units by 16 per unit

Required :
Using FIFO , LIFO and W.A methods.
to Determine :
– Cost of goods sold
– Cost of inventory on hand at 31/12/2011
– Profit/Loss Realized for 2011
– Inventory Turnover and days in Inventory

7. sandar

Pls I need help to solve this.

I want to know that can I replace the inventory turnover ratio: Cost of sale/Average Stock with Cost of sale Qty/Average Stock Qty or not. Thanks.

8. ruchi patil

How will the ratio be calculated if opening stock is not given …at that time total sales/closing stock would be the formula…but why?

9. Ellie Monica

(a) what are two methods for calculating inventory turnover?
(b) using the two methods listed in 3.1 calculate inventory turnover for ABC company in 2013

2012 2013
Revenue \$ 1000 000 \$ 1500 000
Costs of goods sold \$ 500 000 \$ 600 000
Inventory \$ 95 000 \$ 100 000

Thanks

10. Accounting For Management

ITR = 600,000/97,500*
=6.15

*(95000 + 100,000)/2

11. Shashi

Hi, if we do ,
Inventory turnover= (average inventory/cost of good sold)
Is ok or not?
I want to find inventory turnover for the year so what is the equation ? Should I * by 365?

12. Accounting For Management

The basic equation is:
Inventory turnover ratio (ITR) = Cost of goods sold/Average inventory at cost

If you also want to calculate average selling period then divide 365 by ITR figure:
Average selling period = 365/ITR

hope this helps.

13. decy

the mraz inn and resort ask you to prepare an inventory report for the past transactionfor the anticipation of purchasing new inventories. these are the info.’s available in the resort book: 20 rooms are sold at P1500 per room; food and beverages sales is P15000; cost of rooms in P900 per room and P9000 for food and beverages. the beginning inventory is P4000 and the ending is P1000. compute for the stock turn at cost and stock turn at sales value.

14. lilly

during the year sales made were \$400000.its gross profit ratio was 25% and net profit ratio was 10%.Ths stock turnover ratio was 10times.calculate gross profit, net profit. cost of goods sold and operating expenses.

I have calculated gross profit as 25%*400000=100000. I don’t know if I did correctly please assist me with others.

thank you in advance

15. sidarth

how can i solve this omega ltd. has authority to issue 1,00,000 shares of rs 100 each at premium 10% on allotment. it invited applications for 75000 shares but applications were received for rs 50000 shares only . money was as follow 25 % on app 25%on allotment 25% on first call 2nd and final call not to be made for the time being give journal enteries

16. Naveen

what is opening & closing stock, if i have salable stock & not salable stock? without any subtract value…
For Exam:- salable stock = 0
Not salable stock= 3000

17. sony

Charlie’s Cycles Inc. has \$150 million in sales. The company expects that its sales will increase 5% this year. Charlie’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:

Inventories = 14 + 0.1010(Sales)

Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company’s year-end inventory level and its inventory turnover ratio?

18. Govind

Pls. confirm that what should be the best inventory turnover ratio or stock-turn in Customized jobs production company?

19. MEL

How do I analyse inventory turnover ratio for ratio analysis

20. Susanne

Question: Should you use Inventory components (bottles, boxes, etc) in the Inventory Turn valuation or just Inventory Assemblies? It seems like it would just be finished goods or assembled items because the parts are not “saleable” until they are made into finished products.

21. Brittney

The following information was available for Blossom Company at December 31, 2017: beginning inventory \$93000; ending inventory \$146000; cost of goods sold \$676000; and sales \$824000. Blossom inventory turnover ratio (rounded) in 2017 was?

22. WKV

WHAT ARE THE USES OF STOCK TURNOVER RATIO

23. Carol

Saks One is considering changing its inventory policy. At present the inventory turn over 12 time per year. Variable costs are 60percent of sales. The rate of return is 21 percent. Sales and inventory turnover data are as follows:
Sales Turnover
K800,000 12
K 870,000 10
K 950,000 7
K 1,200,000 5
a) Determine the inventory level that results in the greatest net savings.

24. Soni

Opening inventory is 6 lakh purchase during the year 2010 and 11 was 34 lakh cells during the year 2010 and 11 was 48 lakhs on March 31 2011 the value of inventory as per physical inventory taking was rupees 325000 the company’s gross profit on sales has remained constant at 25% the management of the company suspects that some inventory might have been pilfered by a new employee what is the estimated costof missing inventory

25. Sammi Kumar Dwivedi

I have a problem of accountancy & I need the answer of this question.
Problem is:
Average stock carried by a trader is ₹60000. Stock turnover ratio is 10 times. Goods are sold at a profit of 10% on cost. Find out his profit .

26. Suchismita Suar

Equity share capita 250000
Closing stock 600000
Stock turn over ratio 5 times
G.p ratio 25%
Netprofit/sales 20%
Netprofit/Capital 1/4
How to prepare Balance sheet

27. aisha

Calculate Inventory TO ratio. annual revenue from operation is 200000, gross profit 20% on cost of revenue from operation. inventory at beginning 38500 and at end 41500.

1. Swarnali Sarkar

if Cost of RFO is 100, then GP is 20
hence RFO is 120.
GP=20/120×200000 = 33334
cost of RFO=200000-33334 =166666
Average Inventory=38500+41500 /2= 80000/2= 40000
ITR = Cost of RFO /average inventory
= 166666/40000
= 4.17 times

maybe this is correct but i am not fully sure.

28. Udesh

How to calculate the production when ‘Sales’, ‘Opening Stock’ and ‘Closing Stock’ is given?

29. Swarnali Sarkar

If there is gross loss then will it be added to RFO,to calculate the cost of RFO?

30. Baby

Hi,
I need help to clear my doubt.
ABC limited has its opening inventory of \$25000. Then they add \$5000 during the year. The sale amount is \$5000. Then how will be the equation to find out inventory turn over ratio? What is the difference if it taken as Total sales/opening inventory+total purchase?

31. yvonne

bus quantity= 8000 R/unit = 20000/bus labor = 32000 h r/unit = R12/h calculate the ratio of sales to cost

32. sard

The sales of a firm amounted to Birr 600,000 in a particular period on which it had a gross margin of 20%. The stock at the beginning of the period was worth Birr 70,000 and at the end of the period of Birr 90,000. Required:-
a) Calculate inventory turnover ratio and average age of inventory
b) Evaluate the desirability of inventory management of the firm if the industry average age of inventory is 51 days

33. Bhupendra singh

Rate of Gross Profit on cost is 25%. Total sales is Rs. 1,00,000 and Average Stock is Rs. 1,60,000. Stock Turnover Ratio will be—

34. Bhupendra singh

Please provide solution of this question

35. Tanu Jain

From the following information calculate inventory turnover ratio
Cash sales =120000
Credit sales =185000
Sales return =5000
Gross profit ratio is 40 percent
Opening inventory =25000
Closing inventory =35000

1. Tanu Jain

2. deepak gupta

36. Aarav singh

Stock turnover ratio = 8 times
Sales = Rs. 200000
Gross profit = Rs. 40000
Opening stock = Rs. 16000
Calculate closing stock

37. soundarya

Credit sales rs.1,50,000
Cash sales 2,50,000
Regular inward 25,000
Opening stock 25,000
Closing stock 35,000

Find out:
1. Inventory turnover when gross profit is 20%
2. Inventory conversion period

38. Ankita

I have a problem . In one my ratio sum cogs opening and closing balance is given.. which one will I take to find out inventory turnover ratio ???

39. can you help me find ending inventory if sales= rs 300000, gross profit= 20%, beginning inventory= rs 60000, inventory turnover ratio= 5 times

40. mercy

thank you for your help guys

41. Akshoy

Hi there!Can someone please explain why COGS is divided by Average Inventory?

42. Vinoth

How calculate average inventory cost
whether it is Raw material cost else stage wise cost [Raw Material cost +Operation Cost ]
kindly Support

43. Catherine K

What would the turn look like with 0 ending inventory units?

44. megesha

The sales of a firm amounted to Birr 600,000 in a particular period on which it had a gross margin of 20%. The stock at the beginning of the period was worth Birr 70,000 and at the end of the period of Birr 90,000.
Required:- Calculate inventory turnover ratio and average age of inventory

45. Bindu Mallula

Net sales=10,00,000
Gross profit=30% on sales
Stock turn over ratio =7%
Calculate closing stock value,if it is 30,000excess of opening stock?