Inventory turnover is calculated as cost of goods sold divided by which of the following?

• A. Total assets
• B. Average inventory
• C. Ending inventory
• D. Net sales

Answer: (B)

Verified step by step guidance

1. Understand the concept of inventory turnover: Inventory turnover measures how efficiently a company uses its inventory to generate sales. It is calculated by dividing the cost of goods sold (COGS) by the average inventory during a specific period.
2. Identify the formula for inventory turnover: The formula is \( \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). Average inventory is used because it accounts for fluctuations in inventory levels over the period.
3. Clarify why average inventory is used: Average inventory is calculated as \( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \). This provides a more accurate representation of inventory levels throughout the period rather than using a single point in time.
4. Compare the options provided: Total assets, ending inventory, and net sales are not appropriate denominators for calculating inventory turnover. Total assets measure overall company resources, ending inventory represents a snapshot at a single point in time, and net sales measure revenue rather than inventory usage.
5. Conclude that the correct denominator for inventory turnover is average inventory, as it reflects the inventory levels over the period and aligns with the formula.