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Calculate the annual Frobisher Industries inventory turnover ratio, when:
Calculate the inventory turnover ratio of Gelato! Gelato! when:
Inventory turnover (also known as inventory turns, stock turns and stock turnover) is a measure of how efficiently a company manages its inventory. The ratio compares the cost of goods sold during a time period to the average inventory value during the same period.
The value of the cost of goods sold is obtained from the income statement of a business. Average inventory is calculated as the sum of the inventory at the beginning and end of the period divided by 2. The values of beginning and ending inventory are obtained from balance sheets at the beginning and end of an accounting period.
In general, a higher inventory turnover value indicates better performance. A lower value indicates inefficient inventory control, over-stocking and increased inventory holding costs. A very high value of this ratio, however, might indicate loss of sales due to inventory shortages.
It’s dangerous to generalize, however. Inventory turnover values can be wildly different for different industries. Businesses that trade perishable goods have very higher turnover compared to those dealing in durable goods. So, comparisons would be fair only if they were made between businesses in the same industry.
Inventory Turnover = Cost of goods sold / Average inventory value