How is Days' Sales in Inventory calculated?

Days' Sales in Inventory (DSI) is a measure used to evaluate how efficiently a company is managing its inventory by indicating the average number of days it takes to sell its entire inventory. The correct method for calculating DSI is to take the number of days in a year (commonly 365 days) and divide it by the Inventory Turnover ratio.

The Inventory Turnover ratio itself is calculated as Cost of Goods Sold (COGS) divided by average inventory. Thus, higher inventory turnover indicates that a company is selling its inventory quickly, while a lower turnover ratio suggests a slower sales rate. By using the formula 365 divided by Inventory Turnover, you can calculate how many days it typically takes for a company to turn its inventory into sales.

This approach allows managers and investors to gain insights into operational efficiency, enabling them to make informed decisions about inventory management. The other options do not accurately reflect the relationship of these calculations with respect to days' sales in inventory. For example, dividing inventory by COGS does not directly yield the number of days to sell inventory and thus does not provide a measure of time.