ACCT 1A Lecture Notes - Lecture 3: Inventory Turnover

• School: Irvine Valley College
• Department: Accounting
• Course: ACCT 1A
• Professor: urell

Document Summary

The primary goals of inventory management are to have sufficient quantities of high-quality inventory available to serve customer"s needs while minimizing the costs of carrying inventory (production, storage, obsolescence and financing) The inventory turnover ratio is an important measure of the company"s success in. Analytical question: how efficient are inventory management activities. Inventory turnover ratio = (cost of sales)/ average inventory. Average inventory= (beg inventory + end inventory) / 2. The inventory turnover ratio reflects how many times the average inventory was purchased and sold during the period. A higher ratio indicates that inventory moves more quickly through the operating cycle, reducing storage and obsolescence costs. If less money is tied up in inventory, then any excess can be invested to earn interest income or to reduce borrowings, which reduces interest expense. More efficient purchasing practices such as just-in-time inventory, as well as high product demand and matching of supply to demand will result in a higher ratio.