# How to calculate the inventory turnover ratio?

A common ratio that is tested on the BEC exam is the inventory turnover ratio. The inventory turnover ratio is calculated by taking cost of goods sold and dividing by average inventory. The inventory turnover ratio tells us how many times a company sells through or flips their inventory each year.

In general, a company wants to have as high of an inventory turnover ratio as possible. The lower the inventory turnover ratio the company has, the longer they have cash tied up in inventory that isn’t be sold.

Let’s go through an example inventory turnover question you could see on the BEC section of the CPA exam.

**Example Question**

The company had beginning inventory of $17,000, purchases of $56,000, and ending inventory of $13,000. What was the company’s inventory turnover ratio for the year?

**Solution **

Step 1) Since the question doesn’t give us cost of goods sold, we are going to have to solve for cost of goods sold. We can prepare an inventory rollforward and this makes it easy to solve for cost of goods sold of $60,000.

Step 2) We need average inventory, and the question only gives us beginning and ending inventory. To calculate average inventory, we simply add the beginning and ending balance and then divide by 2. This gives us average inventory of $15,000.

Step 3) Now that we have both inputs for the formula, we are able to calculate the ratio. Take cost of goods sold of $60,000 and divide by average inventory of $15,000, which tells us the company turned their inventory 4 times during the year.

Back To All Questions

## You might also be interested in...

### How to calculate days inventory outstanding (DIO)?

Days inventorying outstanding, which is commonly referred to as days in inventory, is a metric that is used to describe the average number of days that are required to sell inventory. A higher amount of days indicates that a company is less efficient in converting inventory into sales.

### What is the cash conversion cycle and how is the cash conversion cycle calculated?

The cash conversion cycle is a metric that is used to describe how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales. The cash conversion cycle is considered a metric that expresses the length of time, in days, that is takes for a company...