Q:

How do you calculate inventory turnover?

A:

Quick Answer

To calculate inventory turnover, divide the cost of goods sold by average inventory for the quarter or for the year. Use this information to determine if inventory turnover supports the number of quarterly or yearly sales. Rapid or slow inventory turnover may signal changes in demand or poor inventory management.

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Full Answer

  1. Review company income statements

    Review company income statements to find the cost of goods sold. Use the most recent statements when calculating inventory turnover. Look for cost of revenue or cost of sales if cost of goods sold isn't listed on the statement.

  2. Review company balance sheets

    Review company balance sheets to find inventory information. Determine the average inventory by adding inventory amounts from the previous period to the current period and dividing this number by 2.

  3. Calculate inventory turnover

    Divide cost of goods sold by the average inventory amount to determine inventory turnover. Use financial statements from previous years to compare inventory turnover rates to determine how well a company maintains its inventory.

  4. Compare inventory turnover by industry or competition

    Compare the inventory turnover rate to company competitors or to the industry average to determine how the rate of turnover is appropriate to support consumer demand and remain competitive with other companies.

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