In computing the inventory turnover ratio, average inventory is computed as which of the following?

• A. $\frac{BeginningInventory+EndingInventory}{2}$
• B. $\frac{BeginningInventory+EndingInventory}{12}$
• C. $\frac{CostofGoodsSold}{EndingInventory}$
• D. $BeginningInventory+EndingInventory$

Answer: (A)

Verified step by step guidance

1. Understand that the inventory turnover ratio measures how many times a company's inventory is sold and replaced over a period, typically a year.
2. Recognize that to calculate the inventory turnover ratio, you need the Cost of Goods Sold (COGS) and the Average Inventory.
3. Average Inventory is calculated to smooth out fluctuations in inventory levels during the period, providing a more accurate measure than using just beginning or ending inventory alone.
4. The formula for Average Inventory is the sum of Beginning Inventory and Ending Inventory divided by 2, expressed as: \[\frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}\]
5. Use this Average Inventory value in the inventory turnover ratio formula: \[\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}\]