How to Define Inventory Turnover Ratio

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Inventory turnover ratio is the number of times that inventory is sold and replenished in a given period. Determine inventory turnover ratio by calculating the cost of sales divided by the average inventory with help from a certified public accountant in this free video on business and accounting terms.

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Video Transcript

Now we're going to talk about inventory turnover ratios. This ratio represents the number of times that inventory is sold and replenish in a given period. Let's say for example, we this, we go into the business of selling socks and we buy one hundred thousand dollars worth of socks to sell it a profit. After adding new purchases for the current years, say a million dollars and deducting the cost sold during the year of nine hundred and twenty thousand dollars, the remaining inventory at the end of that year would be one hundred and eighty thousand. The inventory turnover ratio we calculated as the cost of sales divided by the average inventory. And in this example, we sold nine hundred twenty thousand dollars of socks that is at our cost and we divide that by the average inventory for the year which was ninety thousand dollars; our inventory turnover ratio would be 6.5

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