Which of the following formulas is used to compute the average days in inventory?

• A. Average Days in Inventory = Net Sales \div Inventory Turnover Ratio
• B. Average Days in Inventory = 365 \div Inventory Turnover Ratio
• C. Average Days in Inventory = Cost of Goods Sold \div Average Inventory
• D. Average Days in Inventory = Average Inventory \div Net Sales

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of 'Average Days in Inventory'. It measures the average number of days inventory is held before being sold, providing insight into inventory management efficiency.
2. Step 2: Recall the formula for 'Inventory Turnover Ratio', which is typically calculated as: \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \). This ratio is crucial for determining the average days in inventory.
3. Step 3: Recognize that 'Average Days in Inventory' is derived from the inventory turnover ratio. The formula is: \( \text{Average Days in Inventory} = \frac{365}{\text{Inventory Turnover Ratio}} \). This formula uses 365 days to represent a full year.
4. Step 4: Compare the given formulas in the problem. The correct formula matches \( \text{Average Days in Inventory} = \frac{365}{\text{Inventory Turnover Ratio}} \), as it directly relates to the inventory turnover ratio and the number of days in a year.
5. Step 5: Eliminate incorrect options by verifying their components. For example, \( \text{Average Days in Inventory} = \frac{\text{Net Sales}}{\text{Inventory Turnover Ratio}} \) and \( \text{Average Days in Inventory} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \) do not align with the standard formula for calculating average days in inventory.