Inventory Turnover / Inventory Turns Definition - Formula - Example - Analysis - Importance

Here we discuss about Inventory Turnover or Inventory Turns Definition, its formula, example, analysis or interpretations and its importance or significance according To Accounting Standards.

Previously we discuss about Inventory Definition, but here we discuss about Inventory Turnover or Inventory Turns Definition. If you don’t read this article, then kindly, read out this topic in order to better understand this particular topic.

Inventory Turns Meaning

Inventory Turns also known as Inventory Turnover or Inventory Turnover Ratio. It is a ratio of Cost of Goods Sold To Average Inventory. This ratio tells us that how many times the company sells its stock or inventory to it customers and replaces (Turnovers) during the Current Accounting Cycle.

Inventory Turnover Ratio Formula

Cost of Sales / Average Inventory

Here Average Inventory = Opening Inventory + Closing Inventory / 2

Analysis / Interpretation:

If this ratio is higher then it means that the company is managing and selling its goods on hand efficiently within the specified the period of time. The higher turnover ratio depends upon the particular industry in which the entrepreneurs competes in the market. For Instance, if the company sells the goods when there is need to have move inventory on hand, then there is increase in loss due to lack of stock. So, there is balance between units of goods sold and units on hand in order to meet the market demand.

Example:

If the Cost of Goods of the company for the Current Accounting Period is Rs. 65000, Opening Inventory is Rs. 30000 and Closing Inventory is Rs. 20000, then Inventory Turns is calculated by using the formula as given below:

Inventory Turns = 65000 / 25000 = 2.6

Average Inventory = 30000 + 20000 / 2 = Rs. 25000

As Inventory Turnover Ratio is 2.6, so it means that the company is good in managing and the selling the inventory. It sells goods about 2.6 times of the inventory on hand in the Specified Accounting Period.

You may also be interested in Types of Financial Ratios And Their Formulas

Importance / Significance

1. While considering the particular industry, If this ratio is higher, then it is clear that the inventory management of the company is performing well in managing and selling the inventory.

2. Inventory Turns plays an important role in case of Competitive Edge because the entrepreneurs can lower the price level or by improving the quality of products can increase the sales and hence get competitive edge over its competitors.

So, Inventory Turns or Inventory Turnover plays an important role in effective Inventory Management and shows the strength of the company that how many times the company sells its Products to Customers during Current Accounting Period.