Inventory turnover formula pearson plus#

Right? If we keep too little inventory, maybe we run into the problem that we get orders from customers and we can't fill them because we don't have enough inventory. Maybe we can keep just the right amount of inventory, Just a small amount of inventory that we can keep turning without ever running out.

But it's still efficient to keep a very manageable amount of inventory. Well that would be very efficient because we don't have any warehouse costs at that point. Well that t shirt just went straight to the customer from the factory that prints them or whatever it is. So every time we needed a t shirt instead of going to our warehouse and have all these costs to maintain a warehouse. Right? So the idea here is how efficiently are we using those inventory levels? Think about it, wouldn't it be most efficient if we didn't have to hold any t shirts at all? If our inventory was zero but we were able to just make tons and tons of sales. The lower amount of inventory we can keep and just sell cogs and and just be making lots of sales. So we would expect that we would turn that inventory into cogs, hopefully a few times, right? And be more efficient. Well, we're gonna have this average balance that we keep in our inventory, but we're gonna be selling it. The cost of goods sold come out of inventory. And it's related to inventory because every time we make a sale right, it comes out of inventory. So it's kind of a cycle, Right? So if you think about it, we're gonna have some number for cost of goods sold. So if you imagine we're gonna have some average level of inventory, say there's $10,000 worth of t shirts that sit in our warehouse at any given time, Right? But that $10,000 of t shirts, Well, it doesn't just sit there and that's always there, right? We're selling T shirts were buying more t shirts. Okay, So what does this really tell us? It tells us how many times we turned our inventory into cogs. Okay, So in this case, cost of goods sold over average infant, that's our inventory turnover. Well if they just give you one number, well that's gonna be your average, that's just gonna be what you use for inventory. Now sometimes when they give you the inventory turnover ratio, they might just give you one number for inventory, they may not say beginning inventory and ending inventory. Right? So that's how we're always going to calculate the average.

Inventory turnover formula pearson plus#

Just like you see up here, right? The average inventory, that's the beginning inventory plus the ending inventory divided by two. So we're gonna do that first, we're gonna add those together and then we're gonna divide by two.

Okay, and the average balance, we're always going to calculate it the same way we're gonna take the beginning balance in that account plus the ending balance in that account. Okay, In a lot of ratios we use this average balance idea. Well it equals cost of goods sold divided by average inventory. So let's look how we calculate this ratio right here. Right? So we want to basically manage that as well as possible. If we sell t shirts we've got boxes of t shirts sitting in a warehouse. Remember when we have inventory, it costs us money to store whatever boxes. So we're trying to see how efficiently we use our inventory. Um But the inventory turnover ratio, this is a really common efficiency ratio that you study in this class. So we'll discuss this in a little more detail. So the inventory turnover ratio, this is going to relate the amount of cost of goods sold, cost of goods sold to average inventory levels.