Inventory Turnover Ratio Assignment Help | Inventory Turnover Ratio Homework Help

Inventory turnover ratio

It is calculated as:
(a)     cost of goods sold
           average inventory


(b)            net sales       
           average inventory


(c)     cost of goods sold
           closing inventory


(d)           net sales       
           closing inventory

It can be seen from above that the inventory turnover ratio may be expressed in either of the four ways as stated above though alternative ‘a’ may be the best possible way to express inventory turnover ratio. It is specifically due to the fact that other alternatives have certain flaws as stated below:

(i)    Alternatives ‘b’ and ‘d’ consider the amount of sales the numerator which includes the amount of profits where as the denominator in the form of either average or closing inventory is normally valued at costs (assuming market price is more).

(ii)    Alternatives ‘c’ and ‘d’ consider closing inventory which ignores the possibility of certain seasonal or abnormal purchases at the end of accounting period which may increase the closing inventory. Alternative ‘a’ does not have both the above stated limitations. As numerator is in the form of cost of goods sold, it does not consider profit. As denominator in the form of average inventory, it considers possibility of seasonal or abnormal purchases at the end of monthly inventory specifically when the size of inventories fluctuates substantially during the year. As such, average inventory may be computed as:

opening inventory  +  Inventory at the end of every month

However, in many cases, for convincing purposes, inventory may be computed as the average of opening and closing inventory only.


A high inventory ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. As such, as a general rule, high inventory turnover ratio is desirable. However, the high inventory turnover ratio should be viewed from some more angles. Firstly, it may indicate that there is under investment in inventory whereby the orgaisation may loose customer patronage if it is unable to maintain the delivery schedule. Secondly, high inventory turnover ratio may not necessary indicate profitable situation. An organisation, in order to achieve a large sales volume, may sometimes sacrifice on profits, whereby a high inventory ratio may not result into high amount of profits.

On the other hand, a low inventory turnover ratio may indicate over investment in inventory existence of excessive or obsolete/non moving inventory, improper inventory management accumulation of inventories at the year end in anticipation of increased prices or sales volume in near future and so on.
There can be no standard inventory turnover ratio which may be considered to be ideal. It may depend on nature of industry and marketing strategies followed by the organisation.