Inventory

Inventory: Raw Materials, Work In Process and Unsold Product as shown on the Balance Sheet.

This formula connects the Income Statement’s “Cost of Goods Sold” to the Balance Sheet’s Inventory. It allows managers to understand how efficiently the company is rotating its Inventory, and if Inventory levels are appropriate for the amount of sales.

The ratio shows the average number of days of material and work in progress (inventory) the company is taking to produce the product before sale by the organization. Shorter duration reflects a higher conversion rate to cash. Also known as Inventory Turns, this ratio is usually measured in Turns per Year where 12 turns means 30 days average inventory. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders/owners.