Accounting formula question
I have some questions about activity/efficiency ratios. My reading tells me that Inventory turnover (in days) =((average inventory)/ (cost of sales)) * 365 . In order for this to be the inventory turnover in days, (average inventory)/ (cost of sales) must be the fraction of the year that it takes for inventory to turnover. My question is where the average inventory figure comes from. It must be a dollar value to cancel out the units of cost of sales in the denominator. So a dollar value for the average inventory must be the average value of the inventory. This leads me to think that this should be the average cost of goods sold for the time period. The denominator is cost of sales, which I assume means cost of goods sold. This does not make sense to me. The average cost of goods sold depends only on how often it is measure. What do I have wrong here?
For it to be *365 the inventory and COGS have to be for one year. Take the inventory from the last day of last year and add that to the inventory of the current year and divide by two to get the average inventory (this is from the balance sheet). Then divide that by the COGS (from the income statement) for the year and multiply by 365 since that is the number of days in the period in question.
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