On one hand, they donвЂ™t want to spend too much cash on inventory. This is kind of a double-sided problem for the company. They also want to make sure that the current products are actually selling that they stock what customers want.

They want to make sure they donвЂ™t purchase too much merchandise because idle inventory reduces cash flow. Managers are concerned with both indications. Either way, a low turnover ratio indicates that the company is having problems. A lower ratio shows that either management is purchasing more merchandiseВ than it can sell or that it is having trouble creating sales. Managers, investors, and creditors use this ratio to measure how well a company is a purchasing and selling its products.

Since most companies donвЂ™t actually compute an average inventory number of a regular basis, you can compute the average of the accounting periodВ by adding the beginning and ending totals and dividing by two. The inventory turnover ratioВ is calculated by dividing cost of goods sold by the average inventory for the period. Shop apple turnover merch created by independent artists from around the globe. In other words, it measures how often a company can sell its average inventory. For instance, a company might purchase a large quantity of merchandise January 1. Average inventory is used instead of ending inventory because many companiesвЂ™ merchandise fluctuates greatly throughout the year. Definition: Inventory turnover, often called merchandise turnover, is a efficiency ratioВ that calculates the number of times average inventory is sold during a period. The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by the average inventory for that period.

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