Inventory Turnover Formula
Learn how to calculate average inventory, inventory turnover ratio, and days inventory outstanding from cost of goods sold and inventory balances.
Inventory turnover estimates how often a business sells and replaces its typical inventory balance during an accounting period. Calculating average inventory first helps make the turnover ratio less dependent on an unusually high or low ending balance.
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Inventory Turnover Ratio
Where:
Divide cost of goods sold for the period by the average of the beginning and ending inventory balances.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| costOfGoodsSold - Cost of Goods Sold | The cost of inventory sold during the accounting period. | currency |
| beginningInventory - Beginning Inventory | The inventory balance at the start of the accounting period. | currency |
| endingInventory - Ending Inventory | The inventory balance at the end of the same accounting period. | currency |
| averageInventory - Average Inventory | The mean of beginning and ending inventory used as the turnover base. | currency |
| periodDays - Days in Accounting Period | The number of calendar days covered by the reporting period. | days |
| inventoryTurnover - Inventory Turnover Ratio | The number of times average inventory was sold and replenished during the period. | number |
| daysInventoryOutstanding - Days Inventory Outstanding | The estimated average number of days inventory remains on hand before sale. | days |
Step-by-Step Calculation
Calculate average inventory
Add the beginning and ending inventory balances, then divide by two.
(beginningInventory + endingInventory) / 2
Calculate inventory turnover
Divide the cost of goods sold by average inventory to find the number of inventory cycles in the period.
costOfGoodsSold / averageInventory
Calculate days inventory outstanding
Divide the number of days in the accounting period by inventory turnover to estimate average holding time.
periodDays / inventoryTurnover
Annual inventory turnover calculation
Find average inventory
($100,000 + $150,000) / 2
$125,000
Calculate turnover
$500,000 / $125,000
4.00 times
Calculate days inventory outstanding
365 / 4.00
91.25 days
Final Result
Average inventory is $125,000, inventory turnover is 4.00 times, and days inventory outstanding is about 91.3 days.
Assumptions
- ✓Cost of goods sold and both inventory balances use the same reporting currency and inventory valuation basis.
- ✓Beginning and ending inventory reasonably represent inventory levels over the period.
- ✓Cost of goods sold relates to the same accounting period as the inventory balances.
- ✓Average inventory is calculated using two balances rather than detailed daily or monthly inventory data.
Limitations
- !A two-point average can be less representative when inventory changes sharply during the period.
- !The ratio does not show whether inventory movement was profitable or whether stockouts occurred.
- !Seasonality, product mix, promotions, supply disruptions, and new locations can materially affect comparisons.
- !Turnover is most meaningful when compared across equivalent periods and businesses using consistent accounting methods.
Common Mistakes to Avoid
Using sales revenue instead of cost of goods sold while inventory is measured at cost.
Using beginning and ending balances from different reporting periods.
Comparing a monthly turnover ratio directly with an annual ratio without adjusting for period length.
Treating a high turnover ratio as automatically positive without considering stock availability and margins.
Relying only on ending inventory instead of calculating average inventory.
Related Formulas
Frequently Asked Questions
What is the formula for inventory turnover?
Inventory turnover equals cost of goods sold divided by average inventory. Average inventory equals beginning inventory plus ending inventory, divided by two.
How do you calculate average inventory?
Add the beginning inventory balance to the ending inventory balance and divide the total by two.
How do you calculate days inventory outstanding?
Divide the number of days in the accounting period by the inventory turnover ratio. For a full year, the period commonly uses 365 days.
Why is cost of goods sold used in inventory turnover?
Inventory is normally recorded at cost, so cost of goods sold provides a more consistent basis for comparison than sales revenue.
Can inventory turnover be calculated for a quarter?
Yes. Use cost of goods sold, beginning inventory, ending inventory, and the number of days for that quarter. Compare it with periods calculated on the same basis.
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