What does inventory turnover measure?

What does inventory turnover measure?

• A. How many times a company turns inventory into sales in a year
• B. How quickly accounts receivable are collected
• C. The ratio of inventory to sales
• D. The amount of inventory a company holds

Answer: (A)

Inventory turnover measures how many times a company sells and replaces its inventory in a period, typically a year. It’s usually calculated as cost of goods sold divided by average inventory, which shows how efficiently inventory is managed and how quickly it converts into sales. A higher turnover means goods are sold quickly and inventory isn’t sitting unsold, while a lower turnover suggests slower sales or excess stock. This is different from how quickly receivables are collected, which relates to accounts receivable turnover. It isn’t simply the ratio of inventory to sales, which doesn’t capture the rate at which inventory is turned into sales, and it isn’t the amount of inventory on hand, which reflects inventory levels rather than the speed of turning them into sales.

Inventory turnover measures how many times a company sells and replaces its inventory in a period, typically a year. It’s usually calculated as cost of goods sold divided by average inventory, which shows how efficiently inventory is managed and how quickly it converts into sales. A higher turnover means goods are sold quickly and inventory isn’t sitting unsold, while a lower turnover suggests slower sales or excess stock. This is different from how quickly receivables are collected, which relates to accounts receivable turnover. It isn’t simply the ratio of inventory to sales, which doesn’t capture the rate at which inventory is turned into sales, and it isn’t the amount of inventory on hand, which reflects inventory levels rather than the speed of turning them into sales.