 Days of Inventory Turnover Ratio and QuickBooks 2012 - dummies

# Days of Inventory Turnover Ratio and QuickBooks 2012

The days of inventory turnover ratio is one of several activity ratios you can use to help manage your assets in QuickBooks 2012. The days of inventory ratio resembles the inventory turnover financial ratio; it estimates how many days of inventory a firm is storing. The ratio uses the following formula:

`average inventory/(annual cost of goods sold/365)`

For example, the simple balance sheet shows inventory equal to \$25,000. Assume that this also equals the average inventory that the firm carries.

 Assets Cash \$25,000 Inventory 25,000 Current assets \$50,000 Fixed assets (net) 270,000 Total assets \$320,000 Liabilities Accounts payable \$20,000 Loan payable 100,000 Owner’s equity S. Nelson, capital 200,000 Total liabilities and owner’s equity \$320,000

In order to calculate the daily sales, you take the cost of goods sold number reported in the annual income statement shown and divide it by 365 (the number of days in a year).

 Sales revenue \$150,000 Less: Cost of goods sold 30,000 Gross margin \$120,000 Rent 5,000 Wages 50,000 Supplies 5,000 Total operating expenses 60,000 Operating income 60,000 Interest expense (10,000) Net income \$50,000

Putting these numbers together in the formula just introduced, the math looks like this:

`\$25,000/(\$30,000/365)`

This formula returns the value 304 (roughly). This value means that this firm is carrying roughly 304 days of inventory. Stated another way, this firm would require 304 days of sales to sell its entire inventory.

As is the case with the inventory turnover ratio, you don’t see generalized rules for what is an acceptable number for days of inventory. The general rule is that you turn around your inventory just as quickly as your competitor does.