What formula represents inventory turnover?

The formula for inventory turnover is represented by the ratio of cost of goods sold to average inventory. This ratio provides insight into how efficiently a company is managing its inventory. Specifically, it indicates how many times a company's inventory is sold and replaced over a specific period, typically a year.

Using the cost of goods sold in the numerator reflects the total cost to the company of purchasing and producing the inventory that has been sold. By dividing this figure by the average inventory, the formula shows how many times the inventory was turned over, or sold, within that timeframe. A higher inventory turnover ratio generally suggests strong sales and effective inventory management, while a lower ratio may indicate overstocking or slow-moving inventory.

Other options, while related to inventory metrics, do not correctly represent the inventory turnover ratio based on standard accounting principles. For example, using sales instead of cost of goods sold would not accurately reflect the cost aspect of inventory turnover, which is essential for understanding how effectively inventory is managed relative to the costs incurred.