The opening and closing inventory balances are $9,000 and $7,000 respectively. It reports a net sales revenue of $75,000 and a gross profit of $35,000 on its income statement for the year 2022. True Dreamers is a US based small trading company. Inventory turnover ratio = Sales/Inventory Examples of inventory turnover ratio For example, if only sales and year-end inventory balance is given in the problem or homework assignment, then there would be no other option but to apply the following formula: If cost of goods sold is unknown, the net sales figure can be used as numerator and if the opening balance of inventory is unknown, closing balance can be used as denominator. The use of average inventory rather than just the year-end inventory balance helps minimize the impact of seasonal variations in turnover. Average inventory in denominator part of the formula is equal to opening balance of inventory plus closing balance of inventory divided by two. Cost of goods sold is equal to cost of goods manufactured (purchases for trading company) plus opening inventory less closing inventory. Two components of the formula of ITR are cost of goods sold and average inventory at cost. Inventory turnover ratio is computed by dividing the cost of goods sold by average inventory at cost. Other names used for this ratio include stock turnover ratio, inventory turns, stock turns and rate of stock turnover. A lower number, on the other hand, may indicate otherwise. For example, having an inventory turnover ratio of 10 means the firm has sold and refilled its average inventory 10 times during the period selected for analysis.Ī higher ITR number may signify a better inventory procurement and effective use of resources allocated to promote sales. It measures how many times a company has sold and replaced its inventory during a certain period of time. Inventory turnover ratio (ITR) is an activity ratio which evaluates the liquidity of a company’s inventory.
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