Days of Inventory Turnover Ratio and QuickBooks 2012 - dummies

Days of Inventory Turnover Ratio and QuickBooks 2012

By Stephen L. Nelson

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.

A Simple Balance Sheet
Cash $25,000
Inventory 25,000
Current assets $50,000
Fixed assets (net) 270,000
Total assets $320,000
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).

A Simple Income Statement
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:


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.