In computing the inventory turnover ratio, how is average inventory typically calculated for the period?

• A. Beginning inventory minus ending inventory, divided by 2
• B. Beginning inventory plus ending inventory, divided by 2
• C. Ending inventory divided by beginning inventory
• D. Beginning inventory plus ending inventory

Answer: (B)

Verified step by step guidance

1. Understand that the inventory turnover ratio measures how many times a company sells and replaces its inventory during a period.
2. Recognize that to calculate the inventory turnover ratio, you need the cost of goods sold (COGS) and the average inventory for the period.
3. Know that average inventory is typically calculated to smooth out fluctuations in inventory levels over the period.
4. Use the formula for average inventory: \(\text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}\).
5. Apply this average inventory value in the inventory turnover ratio formula: \(\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}\).