Which formula is used to compute a company’s inventory turnover ratio?

• A. Average inventory divided by cost of goods sold
• B. Cost of goods sold divided by average inventory
• C. Net sales divided by average inventory
• D. Gross profit divided by ending inventory

Answer: (B)

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.
2. Recall that the formula involves the cost of goods sold (COGS) and the average inventory, as these reflect the flow of inventory and its usage.
3. Identify the correct formula as the cost of goods sold divided by the average inventory, which shows how efficiently inventory is managed.
4. Express the formula mathematically as: \(\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}\)
5. Note that average inventory is typically calculated as: \(\text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}\) to smooth out fluctuations.