Question

Consider the following data from a company annual report: which of the following is inventory turnover? Sales: $1,200,000 Cost of Goods Sold: $60,000 Raw Materials Inventory: $80,000 Finished Goods Inventory: $20,000 Work-in-Process: $20,000

Answer 1

Answer:

The inventory turnover is 0.5

Explanation:

Inventory turnover ratio or stock turnover ratio is ratio which tells about how much of inventory company has sold and how much of it is left. This ratio helps management in making right decisions regarding pricing and marketing strategy, manufacturing etc.

FORMULA FOR CALCULATING INVENTORY TURNOVER RATIO =

$\frac{COST OF GOODS SOLD}{AVERAGE INVENTORY}$

Here we will take cost of goods sold not sales because by taking cost of goods sold we will get better accuracy , as sales will include a mark up over cost.

Average inventory will include raw material inventory, finished goods and work in progress

$\frac{\ 60000}{\ 80000+\ 20000+\ 20000}= .5$

Therefore the average turnover ratio is 0.5