![]() In the event that the firm had an exceptional year and the market paid a premium for the firm's goods and services, the numerator may be an inaccurate measure. Sales are generally recorded at market value, which is the value at which the marketplace paid for the good or service provided by the firm. The cost of sales is considered to be more realistic because of the difference in which sales and the cost of sales are recorded. The cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis. Some compilers of industry data (e.g., Dun & Bradstreet) use sales as the numerator instead of the cost of sales. When making comparisons among firms, they check the cost-flow assumption used to value inventory and the cost of products sold. In assessing inventory turnover, analysts also consider the type of industry. This often can result in stock shortages. A high turnover rate may conversely indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low.However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages. A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort.Inventory turnover measures the efficiency of the firm in managing and selling inventory: thus, it gauges the liquidity of the firm's inventory.The turnover rate has several significant implications: Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock turnover.īusinesses need to manage their inventories.: Here a woman is checking stock of certain items to maintain an accurate record for dollars of inventory in stock. The equation forinventory turnover is the cost of goods sold (COGS) divided by the average inventory. This ratio tests whether a company is generating a sufficient volume of business based on its inventory. In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. liquidity: An asset's property of being able to be sold without affecting its value the degree to which it can be easily converted into cash.COGS: COGS (cost of goods sold) is the inventory costs of those goods a business has sold during a particular period.turnover: The number of times a stock is replaced after being used or sold, a worker is replaced after leaving, or a property changes hands.A high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low.The equation for inventory turnover is the cost of goods sold (COGS) divided by the average inventory. ![]() He graduated with a degree of Bachelor of Science in business administration. Aside from being an accountant, Avenir is also a business consultant. He is a technically inclined businessman experienced in construction and real estate development. ![]() Raul Avenir has been writing for various websites since 2009, authoring numerous articles concentrated on business and technology. Accounting Tools: FIFO vs LIFO Accounting.AccountingCoach: What is the Inventory Turnover Ratio?.United States Internal Revenue Service: Accounting Periods and Methods.Board of Governors of the Federal Reserve System: What is Inflation and How does the Federal Reserve Evaluate Changes in the Rate of Inflation?. ![]()
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