Inventory Turnover Ratio (ITR) – Formula

An Inventory Turnover Ratio is the kind of efficiency ratio that shows how effective inventory maintained by comparing the cost of goods sold (HPP) and the average inventory for a given period.

Inventory Turnover ratio measures the average inventory "rotated" or "sold" for a period. In other words, Inventory Turnover Ratio measures how many times a company sells a total of average inventory during the year in question. This ratio is a good indicator to assess the quality of the inventory and purchasing practices that are effective in inventory management (Inventory Management).

There are two main components in this Inventory Turnover Ratio, the first was the purchase of goods (stock purchasing) to inventory and the second is the sale (sales). If the number of items bought many large amount of build-up causing, then the company should seek to sell them in large numbers as well to improve the rotation of its preparation (Inventory Turnover).

If not, then it would have incurred the costs of storage inventory and handling costs of other inventories. The sale must comply with the purchase of the goods/supplies in order to build-up can spin effectively. That is why the Department of purchase should be aligned with the Sales Department.

ITR Formula (Inventory Turnover Ratio)

Inventory Turnover ratio is calculated by dividing the cost of goods sold (HPP) for a given period by the average inventory for the period. The following is the formula of the ratio of the velocity of inventory or Inventory Turnover Ratio.

Inventory Turnover ratio = sales/average Inventory

As a side note, the use of average inventory in this formula is as a replacement for the very ending inventory fluctuates on throughout the year. For example, a company might buy merchandise in huge quantities at the beginning of the year (e.g. January) and sell it in the next month so that the inventory at the end of the year (e.g. December) would be a very few.

The condition is not accurately to reflect the company's actual inventory throughout the year. Average inventory or Average Inventory is calculated by adding the initial inventory and ending inventory and then dividing it by two.

Average Inventory = (Beginning Inventory + ending inventory)/2

Inventory Turnover Ratio Formula so that it can also be written as follows:

Inventory Turnover ratio = sales/ ((Beginning Inventory + ending inventory)/2)

Example cases

A shop that sells mobile phone to report the cost of goods sold on the income report to lose $ 500 million. The initial inventory of this store was $ 800 million while supplies finally is $. 700 million. What is the ratio of the velocity of inventory or ITR the cell phone Store?

Solution

Note:

Sale: $500 million,-
Preparation Early = $ 800 million.
ending inventory = $ 700 million.

Inventory Turnover Ratio (Inventory Turnover Ratio) =?

Answer:

Inventory Turnover ratio = sales/((Beginning Inventory + ending inventory)/2) Inventory Turnover Ratio
= $. 500 million/(($ 800 million + $ 700.000.000)/2) Inventory Turnover Ratio
= 0.6 times



So the ratio of the velocity of inventory or Inventory Turnover Ratio this is the mobile phone Shop of 0.6 times.

ITR (Assessment of ITR)

Inventory turnover is a measure of how efficiently a company can control the merchandise or its preparation. The higher the ratio the more efficient cycle all its company is in control of its preparation. A high turnover ratio indicates the company in question does not issue the costs too much to buy merchandise and can avoid waste-waste company resources when supplies are not sold in accordance with expectations. High Inventory Turnover ratio also showed that companies can effectively sell stock he bought.

For investors, this ratio can be use to measure the liquidation of the company in question. This is because the inventory is one of the company's assets or the assets mainly in retail companies. This ratio measurement shows how easy the company change the availability into cash. Whereas for creditors, Inventories are also often used as loan guarantees. The lender or the Bank uses this ITR to find out how easy it can be sold so that the inventory can be converted into cash.