Wize University Introduction to Financial Accounting Textbook > Inventory
Inventory Turnover Ratio and Average Days to Sell
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Inventory Turnover Ratio and Average Days to Sell
A company's ability to sell inventory is important and is a key indicator of liquidity. The faster inventory is turned into cash the more cash the business has to reinvest throughout its operations.
Inventory Turnover Ratio
- How many times per period inventory is sold
- Higher ratio means higher liquidity
Average Days to Sell
- Also called "Days in Inventory"
- How many days it takes, on average, to sell inventory
Wize Tip
To calculate the average days to sell using an inventory turnover ratio that is not annual, you should convert it to an annual ratio by multiplying.
Annual inventory turnover ratio:
Quarterly inventory turnover x 4
Monthly inventory turnover x 12
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Example: Inventory Turnover Ratio and Average Days to Sell
The following transactions took place during August 2020, all purchases and sales were on account.
The following information is available:
- COGS for the month totalled $813
- Ending Inventory is $370
Compute the inventory turnover ratio and average days to sell?
Practice: Inventory Turnover Ratio and Average Days to Sell
ABC Inc. had the following transactions affecting inventory during 2020, the company uses FIFO and the perpetual inventory system:
Compute the inventory turnover ratio
Do not round your calculations, round final answer to 2 decimal places.