What is the relationship between Days’ Sales in Inventory and Inventory Turnover?

The relationship between Days’ Sales in Inventory and Inventory Turnover is expressed by the formula that connects these two financial metrics. Days' Sales in Inventory measures the average number of days that inventory is held before it is sold, while Inventory Turnover indicates how many times a company sells and replaces its inventory within a specific period, usually a year.

The correct formulation is that Days' Sales in Inventory equals 365 divided by Inventory Turnover. This relationship makes intuitive sense: if a company has a high Inventory Turnover, it indicates that inventory is sold quickly, thus leading to fewer days' sales in inventory. Conversely, a lower Inventory Turnover suggests that inventory is sold more slowly, resulting in more days of inventory held.

This formula is derived from the understanding that Inventory Turnover is calculated as Cost of Goods Sold (COGS) divided by average inventory. If you rearrange this concept, you can derive the days it takes to sell inventory, leading directly to the relationship described. This helps in assessing operational efficiency and inventory management practices within a business.

While other options involve incorrect calculations or relationships between these metrics, the second option accurately reflects the inverse relationship between the two, making it the correct choice.