Cost of Goods Sold Method
Definition – What is Inventory Turnover?
Turnover is measured as a ratio of Sales to Inventory over a year. A turnover of ‘1’ means that over the entire contents of inventory is sold in over the year.
DSI (days of sales inventory) is a measurement of how many days are required to turn over the entire inventory.
Formula – How to calculate inventory turnover
Turnover = (Sales ÷ Inventory) x 100%
DSI = Turnover ÷ 365
A business has sales of $50,000, cost of goods sold of $20,000, and average inventory of $12,000.
Turnover (revenue method) = ($50,000 / $12,000) x 100% = 4.1667 x 100% = 416.67%
Turnover (cost of goods sold method) = ($20,000 / $12,000) x 100% = 1.667 x 100% = 166.67%
Sources and more resources
- Investopedia – Inventory Turnover – Some methods on how to calculate inventory turnover.
- Wikipedia – Inventory Turnover – Formulas on inventory turnover. Includes inventory application in business.
- Accounting Tools – Inventory turnover formula – Describes inventory turnover and includes some formulas for its calculation.
- The Balance SMB – What is inventory turnover? – An overview of how to calculate inventory turnover.
- Wikihow – How to calculate inventory turnover – How to calculate the inventory ratio.