Which formula correctly defines the inventory turnover ratio?

• A. COGS ÷ Average Inventory
• B. Ending inventory ÷ COGS
• C. Average Inventory ÷ COGS
• D. Beginning Inventory ÷ COGS

Answer: (A)

Inventory turnover measures how many times inventory cycles through the business in a period. The best way to capture that flow is to take the cost of goods sold for the period and divide it by the average inventory held during that period. Cost of goods sold represents the total value of inventory that actually moved out of stock, while average inventory—calculated from the beginning and ending inventory—smooths out seasonal swings so the measure reflects the typical level of stock over time. This combination yields a meaningful number of times the stock was sold and replenished during the period. Using ending or beginning inventory would distort this flow, and taking the inverse (average inventory divided by COGS) would not express turnover correctly. For example, if COGS is 500,000 and average inventory is 100,000, the turnover is 5, meaning the inventory turned over five times.