### Inventory Turnover Ratio

```Selling It!
A Look at the
Inventory Turnover Ratio
Meet Nathan “Nate” Smith
Nate Smith works for Esperante Music
Sellers (EMS). After four years he’s
learned a lot about the “alternative music”
scene, often visiting backstage at local
concerts and clubs.
Recognizing his expertise, EMS has
promoted Nate to Buyer. In this role, he
Identifies new artists and labels.
Develops relationships with regional
suppliers.
Maintains a “hot inventory” for EMS
stores.
Nate’s Better Idea
One of Nate’s first actions was
to convince the owner to use
some of the floor space for
three new sections:
Alternative Rock
Hip-Hop/Rap
Latin
But after a few months, Nate noticed that some of the new
sections aren’t selling as well as he’d hoped.
Question 1
Nate wonders if the new sections are selling better or worse
than the rest of the store. How can he be sure? Which of the
following would be the best course of action?
A. Compare the present inventories with the initial stock
amounts for the new and old sections.
B. Compare the profit from the new sections with that of the
old sections.
C. Survey new customers entering the store.
D. Call a competing music store and see how their sales are
going for these types of music.
What Should Nate Do?
A. Compare the present inventories with the initial
 stock amounts for the new and old sections.
To better understand the actual sales, the
best thing Nate can do is to compare the
inventories: what’s left versus what was
stocked.
Or even better, what has sold versus what
was stocked.
Sales During a Quarter
Nate checked the
numbers on a few
bands…
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
Question 2
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
B. Three Deuces
C. Raunchy Rockets
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
Sales Ratio
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
 B. Three Deuces
C. Raunchy Rockets
The larger the ratio, the
better the sales!
0.80 > 0.75 > 0.72
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = (0.75)
0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 =(0.80)
0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 =(0.72)
0.72
Question 3
DownRight was initially stocked
with 24 CDs. After three months,
there are 8 CD’s remaining.
What is the ratio of number sold
to number stocked?
A. 0.33
B. 0.67
C. 0.75
D. 1.33
Sales Ratio
DownRight was initially stocked
with 24 CDs. After three months,
Stocked: 24
there are 8 CD’s remaining.
– Remaining: 8
What is the ratio of number sold
Sold: 16
to number stocked?
A. 0.33
Sold
16
B. 0.67
Ratio :

 0.67 (rounded)

Stocked
24
C. 0.75
D. 1.33
Question 4
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
C. 67%
D. 75%
E. 133%
Ratio to Percentage
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
P ercentage  R atio  100%
 0.67  100%
 C. 67%
 67%
D. 75%
E. 133%
A Better Way
We’ve been calculating a ratio based simply
on a count of the CDs.
In reality, the store owner is more interested
in costs and income:
The cost to stock the shelves.
The cost of stock remaining.
The income from sales of those CDs.
Ratio of Costs
Using costs (rather than counts):
R at i o 
C ost of G oods S old
Inventory C os t
where the costs can be calculated:
C ost  N u m b er of Item s  C ost p er Item
whether it’s cost of items sold, or cost of items in
inventory.
This ratio is known as Inventory Turnover Ratio.
Question 5
Recall Nate initially stocked 24 of
DownRight’s CDs, and now there are 8 left.
If the CDs cost Nate \$4 each, what is
DownRight’s Inventory Turnover Ratio?
A. \$4 per CD
B. \$3.33
= \$4
C. 75%
D. 0.67
Inventory Turnover Ratio
 D. 0.67
The “cost of good sold” is the number sold times
the cost of each: 16 x \$4 = \$64.
The “inventory cost” is the number stocked times
the cost of each: 24 x \$4 = \$96.
Thus,
In ven tory T u rn over R a tio =

C ost of G ood s S old
In ven tory C ost
\$64
\$96
 0 . 6 7 (rou n d ed )
Nate Takes Inventory
Nate’s consults his paperwork from stocking the
shelves with \$4 CDs, and also counts the number of
unsold CDs in each section.
Latin :
Stocked: 156
Unsold: 31
Alternative Rock:
Stocked: 262
Unsold: 123
Hip-Hop/Rap:
Stocked: 398
Unsold: 33
Question 6
Latin: Stocked: 156, Unsold: 31 (\$4 ea)
Alternative Rock: Stocked: 262, Unsold: 123 (\$4 ea)
Hip-Hop/Rap: Stocked: 398, Unsold: 33 (\$4 ea)
What are the inventory turnover ratios for the three
sections, respectively?
A. 0.20, 0.47, 0.08
C. 0.20, 0.13, 0.23
B. 0.31, 1.23, 0.33
D. 0.80, 0.53, 0.92
Inventory Turnover Ratios
 D. 0.80, 0.53, 0.92
For each category, calculate the ratio of number
sold to number stocked.
For Latin: Stocked: 156, Unsold: 31 (\$4 ea)
N um ber Sold  N um ber Stocked  U nsold
 156  31  125
In ven to ry T u rn o ver R a tio 

N u m b er S o ld
N u m b er S to cked
125
156
 0 .8 0 (ro u n d ed )
Question 7
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
Based on the inventory turnover ratios above, which
new section is selling the fastest? Which is selling
the slowest?
A. Hip-Hop/Rap is fastest; Rock is slowest
B. Latin is fastest; Hip-Hop/Rap is slowest
C. Hip-Hop/Rap is fastest; Latin is slowest
D. Rock is fastest; Hip-Hop/Rap is slowest
Inventory Turnover Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
A.
Hip-Hop/Rap is fastest; Rock is slowest
The largest ratio (0.92) indicates the greatest
turnover, or the fastest selling CDs.
The smallest ratio (0.53) indicates the least
turnover, or the slowest selling CDs.
What’s a “Good”
Turnover Ratio?
Nate is a little worried about the Alternative
Rock section—at least compared to the
other new sections.
But, how do these ratios compare to the rest
of the store’s CD sales?
To answer that question, he consults
Esperante’s quarterly income statement and
balance sheet.
A Quarterly Inventory
Turnover Ratio
From Esperante’s
“financials” for
the last quarter,
Nate finds the
“cost of goods
sold” on the
income statement.
A Quarterly Inventory
Turnover Ratio
And from
the balance
sheet, he
finds the
inventory
cost (or
value) for
the same
quarter.
Question 8
What is Esperante’s
Inventory Turnover
Ratio based on the
previous quarter’s
statements?
A. 0.42
B. 0.85
C. 1.17
D. 2.54
Esperante’s
Inventory
Turnover
Ratio

C. 1.17
C ost of G ood Sold
Inventory C ost

\$ 2 3 2,7 1 0
\$ 1 9 8,7 1 8
 1 .1 7 (rou n d ed )
Question 9
Regarding the inventory turns
ratio, which of the following
would the store manager most
like to see?
A. More sales, and a higher
ratio.
B. More sales, and a lower
ratio.
C. More inventory, and a
lower ratio.
D. Less inventory, and a
higher ratio.
Inventory
Turnover
Ratio
 A. More sales, and a
higher ratio.
more sales!
More sales will yield a
higher inventory turnover
ratio.
Note: a lower inventory will
also cause a higher ratio.
Question 10
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
How do the turnover ratios of Nate’s new sections
compare to Esperante’s quarterly turnover ratio (1.17)?
A. They are all doing better than the rest of the store.
B. None are performing as well as the store average.
C. Latin and Alternative Rock are more popular; HipHop/Rap is worse.
D. Hip-Hop/Rap is a hit; the other two are worse.
Comparing Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
 B. None are performing as well as the store average.
All the new types of music have a lower turnover
ratio than the store’s quarterly value of 1.17.
0.53 < 0.80 < 0.92 < 1.17
So, all the new types of music are selling worse
than the rest of the store’s music offerings.
Interpreting the Inventory
Turnover Ratio
Should be compared against your industry
averages.
Some businesses have a very high turnover; others
have a very low turnover.
A low turnover ratio generally implies poor sales
and/or large or excessive inventories.
A high ratio implies either strong sales or
insufficient inventories.
Question 11
In general, which of the
think would have a relatively
low inventory turnover ratio?
A. Bakery
B. Auto Parts
C. Florist
D. Cellular phone company
Low Inventory
Turnover Ratio

B. Auto Parts
A typical automotive parts store has a large
inventory of parts for many different car makes
and models.
The sales rate of any given part is relatively low.
Low sales and large inventory lead to a low
inventory turnover ratio.
Another Comparison
When comparing turnover ratios, be sure to
compare like time periods (e.g., monthly
sales, quarterly sales, or annual sales).
To make comparisons easier, a related
measure is often used: Days to Turn the
inventory.
D ays to T urn 
A verage Inventory
A verage C ost of G oods S old per D ay
Days to Turn Inventory
A verage Inventory
D ays to T urn 
A verage C ost of G oods S old per D ay
Using Esperante’s quarterly data, calculate Days to Turn.
To get the result in terms of “days,” convert the “quarter of a
year” to days by using unit ratios.
D a ys to T u rn 
\$ 1 9 8,7 1 8
\$ 2 3 2,7 1 0 p er q tr
 0 .8 5 4 q tr

1 yr
4 qtr
 7 8 d a ys (rou n d ed )

365 days
1 yr
Question 12
approximately how long do you think it would
take to sell most of it’s inventory
of music?
A. 1 week
B. 1 month
C. 3 months
D. 6 months
E. 1 year
Days to Turn Inventory

C. 3 months
We calculated that Esperante’s
“days to turn” was 78 days.
That’s a little less than 3 months.
“Days to Turn” is how many
days it takes to sell through
inventory.
Practice Problems
Examine the financial data on the following slide
and calculate the inventory turnover ratio and
days to turn for each.
If possible, find up-to-date financial information
on the Internet for these (and other) companies.
For example: http://finance.yahoo.com
Enter the “stock ticker” (or use “Symbol
Lookup”) for the company.
Look for the links to the “financial statements.”
Real World Financial Data*
A n n u a l D ata
A n n u a l D ata
(in th ou sa n d s)
(in th ou sa n d s)
S a fe w a y In c (S W Y )
K ro g e r C o (K R )
C o st o f R e v e n u e
In v e n to ry
C o st o f R e v e n u e
In v e n to ry
\$ 2 5 ,0 1 8 ,9 0 0
\$ 2 ,6 4 2 ,2 0 0
\$ 3 9 ,6 3 7 ,0 0 0
\$ 4 ,1 6 9 ,0 0 0
C h e vro n T e x a c o C o rp (C V X )
E x x o n M o b il C o rp (X O M )
C o st o f R e v e n u e
In v e n to ry
C o st o f R e v e n u e
In v e n to ry
\$ 7 2 ,1 5 4 ,0 0 0
\$ 2 ,6 4 8 ,0 0 0
\$ 1 2 9 ,9 2 8 ,0 0 0
\$ 8 ,9 5 7 ,0 0 0
H o m e D e p o t In c (H D )
C o st o f R e v e n u e \$ 4 4 ,2 3 6 ,0 0 0
In v e n to ry
\$ 9 ,0 7 6 ,0 0 0
L o w e s C o s In c (L O W )
C o st o f R e v e n u e
\$ 2 1 ,2 3 1 ,0 0 0
In v e n to ry
\$ 4 ,5 8 4 ,0 0 0
M ic ro s o ft C o rp (M S F T )
C o st o f R e v e n u e
\$ 5 ,6 8 6 ,0 0 0
In v e n to ry
\$ 6 4 0 ,0 0 0
A p p le C o m p u te r In c (A A P L )
C o st o f R e v e n u e
\$ 4 ,4 9 9 ,0 0 0
In v e n to ry
\$ 5 6 ,0 0 0
W a l-M a rt S to re s In c (W M T )
T a rg e t C o rp (T G T )
C o st o f R e v e n u e \$ 1 9 8 ,7 4 7 ,0 0 0
In v e n to ry
\$ 2 6 ,6 1 2 ,0 0 0
C o st o f R e v e n u e
In v e n to ry
* from Yahoo! Finance
\$ 3 1 ,7 9 0 ,0 0 0
\$ 5 ,3 4 3 ,0 0 0
SOLUTION
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