Inventory Turnover & Analysis

Inventory turnover measures how quickly inventory is sold
➛ True

Higher turnover always means poor performance
➛ False
Higher turnover usually indicates efficiency | unless too high causing stockouts

DIO measures the number of days inventory is held
➛ True

Average inventory uses beginning and ending inventory
➛ True

1. Inventory turnover = COGS ÷ average inventory

2. Average inventory = (Beginning + Ending) ÷ 2

3. DIO = 365 ÷ Inventory Turnover

4. Low turnover may indicate slow-moving / excess inventory

A business reports
Beginning Inventory = $15,000
Ending Inventory = $25,000
COGS = $80,000

Tasks
Calculate average inventory
Calculate inventory turnover
Calculate DIO

Average Inventory
(15,000 + 25,000) ÷ 2 = 20,000

Inventory Turnover
80,000 ÷ 20,000 = 4 times

Days Inventory Outstanding
365 ÷ 4 = 91.25 days

Average Inventory
➛ $20,000

Inventory Turnover
➛ 4 times

DIO
➛ 91.25 days

State whether each situation is Good or Bad and explain

Very high inventory turnover
➛ Good | with caution
indicates strong sales but may risk stock shortages

Very low inventory turnover
➛ Bad
indicates slow sales or overstocking

High DIO
➛ Bad
inventory stays too long | possible obsolescence

Low DIO
➛ Good
inventory moves quickly

A retail company has declining inventory turnover over three years.

Questions

What does declining turnover indicate?
➛ Slower sales or increasing inventory levels

What problems might the company face?
➛ Overstocking
➛ Higher storage costs
➛ Obsolete inventory
➛ Reduced cash flow

Suggest two ways to improve inventory turnover
➛ Improve sales | marketing, promotions
➛ Reduce excess inventory
➛ Better demand forecasting
➛ Discounts on slow-moving items

How does turnover affect profitability?
➛ Higher turnover improves cash flow and reduces holding costs, increasing profitability.

What is inventory turnover?
➛ The number of times inventory is sold and replaced during a period.

How is average inventory calculated?
➛ (Beginning Inventory + Ending Inventory) ÷ 2

What does high DIO mean?
➛ Inventory is held for a long time.

Why is inventory turnover important?
➛ It measures efficiency and helps manage stock levels and profitability.

Name one way to improve inventory turnover.
➛ Increase sales
➛ Reduce excess inventory
➛ Better forecasting.

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Introduction to Cost Accounting ➧ Here