How is 'inventory turnover' calculated?

Inventory turnover is a key metric in retail and inventory management that measures how efficiently a company manages its inventory. The correct way to calculate inventory turnover is to divide the cost of goods sold (COGS) by the average inventory. This formula provides insight into how quickly a company is selling its inventory during a specific period.

By using the cost of goods sold in the calculation, you are focusing on the actual expenses incurred to produce or purchase the items that were sold. The average inventory function serves to provide a balanced view of inventory levels over time, considering fluctuations that may occur through the year.

High inventory turnover indicates that a company is selling its products quickly and efficiently, which may lead to reduced holding costs and potentially higher profitability. Conversely, a low inventory turnover ratio could suggest overstocking, weak sales, or inefficiencies in inventory management.

The other options provided do not accurately represent the method for calculating inventory turnover, thus reinforcing the significance of understanding the inventory turnover ratio in a retail context.