Some analysts calculate the inventory turnover ratio by dividing sales, rather than cost of goods sold, by the average inventory.Using sales in the numerator will lead to correct measures of the inventory turnover ratio for calculating the average number of days that inventory is on hand until sale.

Question

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The inventory turnover ratio is more accurately calculated using the cost of goods sold (COGS) in the numerator, not sales, because COGS reflects the actual cost of the inventory that was sold, providing a more accurate measure of how efficiently a company manages its inventory. Using sales can overstate the turnover ratio since sales include a markup over the cost.

Some Analysts Calculate the Inventory Turnover Ratio by Dividing Sales