Video Transcript: Inventory Turnover Ratio
Hello and welcome back now we're going to discuss the inventory turnover ratios. An important ratio for managers, investors and creditors to consider when analyzing the company's inventory is the inventory turnover ratio. This ratio tests whether a company is generating a sufficient volume of business based on its inventory. To calculate the inventory turnover ratio, you will divide your cost of goods sold divided by the average inventory. Inventory. Turnover measures the efficiency of the firm in managing and selling inventory. Thus it gauges the liquidity of the firm's inventory. A high inventory turnover is generally a sign of efficient inventory management and profit for the firm. The faster the inventory sells, the less time funds are tied up in inventory. A relatively low turnover could be the result of a company carrying too much inventory or stocking inventory that is obsolete, slow moving or inferior in assessing inventory turnover, analysts also consider the type of industry when making comparisons among firms, they checked the cost flow assumption used to value inventory and cost of products sold. Ambercrombie and Fitch reported the following financial data for 2000 so you have your cost of goods sold, your beginning inventory and your ending inventory, and from there, using the inventory turnover ratio is 7.4 times. You should now understand the importance of taking an accurate, physical inventory and knowing how to value this inventory. In the next chapter, you will learn the general principles of internal control and how to control cash. Cash is one of the company's most important and mobile assets.