1. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Inventory Turnover ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store

2. Management Effective Inventory turnover ratio indicates how: Efficient
How can we get this inventory sold more quickly?
Let’s buy $70 K of inventory.
Purchase from suppliers
Inventory
Sell to customers
Cost of Goods Sold
Management

3. If you hold Inventory too long it can:
10 days
20 days
30 days
60 days
Go sour.
Ughhh!
Pet rock
Go out of style
Become Obsolete
If you hold Inventory too long it can:
Oversupply

4. Christmas Day (December 25th)
December 24th $50 each
December 26th FREE, Please recycle

5. Days sales of inventory
Inventory turnover
Days sales of inventory
24 times per year
4 times per year
Low gross margins
High gross margins

6. $100 Inventory sale – Cost of Goods Sold
Raw materials
Work-in- process
Finished
goods
$100 Inventory purchase
$100 Inventory sale – Cost of Goods Sold
Day 1
< Within One Month >
Day 30
If sell average inventory balance every month,
inventory will “turnover” about 12 times per year

7. Days sales of inventory Days sales of inventory
If we stop buying today, how long is it going to take us to get rid of this stuff?
Inventory turnover
Days sales of inventory
Inventory turnover
Days sales of inventory

8. $0 cash inflow?
Yellow Banana Co.
Brown Banana Co.
Inventory turnover = 60
Inventory turnover = 5
= sell in 6.08 days
= sell in 73 days
(365 days / 5 Inv turnover)
(365 days / 60 Inv turnover)
Sell before turn brown
Sell at full price $.50 lb
Lower inventory carrying costs
Increase liquidity

9. Days sales of inventory
Inv turnover
Days sales of inventory
Bought too much and it spoiled
We aren’t managing our inventory and sales very well.
Became obsolete before they could be sold.
Why?
Bad marketing campaign
Radioactive
bananas

10. Days sales of inventory
Inv turnover
Days sales of inventory
Too short?
Hmmm. I guess I will go somewhere else
We might not have enough inventory to support our sales.
Why?
Customer
= stock outs
Stock out

11. I think if your shelves didn’t look so empty, I would buy more.
Inventory reorder point
Psychic stock
Why would we buy more inventory than we need?
Cycle stock
Just to be safe, I’ll ask my elves to build another 50 M girls bikes.
Safety stock

12. Days sales of inventory Inventory carrying costs Customer satisfaction
Inventory turnover
Cycle stock
Stock outs
Customer satisfaction
Safety stock
Now why do we want more inventory?
Psychic stock

13. Inventory carrying costs
Not enough?
Too much?
Effective and efficient inventory purchases and sales processes and procedures
Missed sales

14. Inventory Turnover Cost of Goods sold Average Inventory
Beg. Inv. + End. Inv.
Average Inventory = 2

15. Inventory Turnover Cost of Goods Sold $1,000 Average Inventory $200
Beg. Inv $170
+ End. Inv $230
Average Inventory $200 = 2

16. Days Sales of Inventory, Average Days to Sell
365
365 days per year
Days Sales of Inventory = 73 days
Inventory Turnover Ratio of 5
Company’s average days of inventory
Industry’s average days of inventory
$200 Inventory purchase
$200 COGS
$200 COGS
Day 1
Day 20
Day 73

17. Inventory Turnover Ratio Days Sales of Inventory=
Cost of Goods Sold
365 days per year
Average Inventory
Inventory Turnover Ratio
If you know 3 out of the four variables, you can solve for the fourth variable.
Inventory Turnover Ratio
13.03
Days Sales of Inventory days = =
Cost of Goods Sold $40 M
365 days per year
Average Inv. ?????
$3.07 M
Inv. Turnover Ratio
13.03

18. Inventory carrying costs
Inventory Turnover Ratio
Year X
Year X2
27.39
Year X3
22.87
Year X4
18.41
Year X5
13.72
Year X6
13.03
Days Sales of Inventory
Year X1
12.12
Year X2
15.96
Year X3
15.96
Year X4
19.83
Year X5
26.60
Year X6
28.01
Inventory carrying costs

19. Yellow Banana Co. Banana Industry Inventory turnover = 60
= sell in 6.08 days
= sell in 4.3 days
(365 days / 60 Inv. turnover)
(365 days / Inv. turnover)

20. Summary Be able to define and compute:
Inventory turnover ratio and days sales of inventory
Use the two ratios to assess management as compared to:
its own past
its industry

21. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Inventory Turnover ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store