What is the formula for the following ratios AND what do they measure? Inventory turnover Days'...

What is the formula for the following ratios AND what do they measure?

Inventory turnover

Days' sales in inventory

Solutions

Expert Solution

INVENTORY TURNOVER RATIO:

Explanation:

Inventory turnover ratio is computed by dividing cost of goods sold for a certain period by average inventory for that period. It shows how many times average inventory is turned into cost of goods sold during a period. For example: Inventory turnover ratio is 2 it means that the entity has turned its average inventory into cost of goods sold 2 times during the period. So higher the inventory turnover ratio more better it is. It shows whether the good produced are demanded in the marketplace or not.

DAYS' SALES IN INVENTORY:

Explanation:

It shows the number of days it took an entity to sell its inventory. If the days' sales in inventory is 45 days it means that the entity requires 45 days to sell it inventory.

Difference between two ratios:

Inventory turnover depicts the number of times inventory is turned into cost of goods sold during the period whereas Days' sales in inventory depicts the duration / period of time between these turns.

ekkarill92 answered 3 months ago

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