How to Calculate the Inventory Period

Average inventory provides managers with how much inventory on hand a company has in terms of days.

Inventory period is more commonly referred to as average inventory period. This refers to how many days' worth of inventory is on hand. A manager can determine average inventory period using either the balance sheet or by using the inventory turnover ratio. Dividing 365 by the firm's inventory turnover also calculates average inventory period. Average inventory period is usually compared between two different companies.

Things You'll Need

• Company's balance sheet and income statement

Instructions

1. Calculate average inventory using the firm's balance sheet. Average inventory equals beginning inventory plus ending inventory divided by two. For example, McDonald's had $111,500 in inventory beginning in 2009, according to its income statement for the period ending Dec. 31, 2009. At the end of 2009, the inventory was $106,200. The average inventory equals $108,850.

2. Determine the cost of goods sold from the firm's income statement. In our example, McDonald's had cost of revenue of $13,952,900 for 2009.

3. Multiply average inventory by 365. In our example, $108,850 times 365 equals $39,730,250.

4. Divide the number calculated in step 3 by the cost of goods sold to calculate average inventory. In our example, $39,730,250 divided by $13,952,900 equals McDonald's 2009 average inventory period of 2.847455 days.

References

• Bizwiz: Average Inventory Period
• Net MBA: Financial Ratios
• A3CC: Average Inventory Period
• Yahoo! Finance: McDonald's Income Statement
• Yahoo! Finance: McDonald's Balance Sheet