The Number Of Days' Sales In Inventory Is Calculated As __________ Divided By __________.

The correct option of this multiple choice question (mcq) is (a), as this ratio shows how many days or time taken by a company to acquire, sell and replace inventory. The average of merchandise and the number of days of sales in current inventory will decide this ratio. If this ratio is small, then it shows that the company’s management is effective in selling merchandise to customers in less days. On the other hand, if this ratio is large, then it means that the company takes more days in selling its current stock of merchandise to customers due to poor inventory management and overstock problems.

The formula to calculate this ratio is shown below:

Number Of Days’ Sales In Inventory (DSI) = Average Inventory / Average Daily Cost Of Goods Sold

The above formula can also be written as shown below:

DSI = Average Inventory / Cost of Goods Sold X 365

Here AI is equal to OI plus CI divided by two (OI + CI / 2)

Example:

If AI is $4,000 and cost of goods sold is $60,000 during the accounting cycle, then the no. of days of sales in inventory is calculated as shown below:

DSI = $4,000 / $60,000 X 365 = 24 days

So, the company takes 24 days (6 days less than a month) to turn its inventory into sales during the accounting cycle.

If this ratio is better than previous accounting cycle, then the management of company is effective in making sales and the company’s business convert its inventory cash quickly which is a good sign for the company’s business to use this cash to pay its current liabilities and carries on its business operations. This effective use of cash flows show that the business is able to make more sales and it is also helpful in expanding the business in future.

The other options (b, c and) of this mcq are wrong choices here.