What formula is used to calculate Inventory Turnover?

The formula used to calculate Inventory Turnover is COGS (Cost of Goods Sold) divided by Average Inventory. It measures how many times a company's inventory is sold and replaced over a specific period. This metric indicates how efficiently a company is managing its inventory, with a higher ratio generally suggesting good inventory management and sales performance.

Utilizing COGS in this formula is critical because it represents the direct costs attributable to the production of the goods that the company sells during a specific period. To have a meaningful measure of turnover, Average Inventory is often used instead of just ending inventory, but the concept focused on here is about how frequently the inventory is sold off relative to the costs incurred in selling that inventory.

In contrast, the other options do not accurately represent the Inventory Turnover ratio: Sales over either ending inventory or inventory alone does not account for the costs of the goods sold, which is crucial for understanding turnover in a financial context.