Inventory holding period formula?

Inventory holding period formula?

• A. COS ÷ Inventories x 365
• B. Inventories ÷ Revenue x 365
• C. Revenue ÷ Inventories x 365
• D. Inventories ÷ COS x 365

Answer: (D)

The main idea is to find how many days, on average, inventory sits before it’s sold. This is the inventory holding period, which is linked to how quickly stock turns over. The turnover is typically measured as cost of sales divided by average inventory. The number of days is then 365 divided by that turnover, which simplifies to 365 × (average inventory / COS). When average inventory isn’t available, closing inventory can be used as a proxy, giving 365 × (closing inventories / COS). That’s why the form Inventories ÷ COS × 365 best represents the holding period. It reflects how much stock there is relative to the cost of goods sold and converts that ratio into days. The other options either invert the ratio, use revenue instead of cost of sales, or mix in the wrong basis, which don’t correctly express the days stock remains unsold. For example, if closing stock is 50, COS is 250, the holding period would be about 365 × 50 / 250 ≈ 73 days.

The main idea is to find how many days, on average, inventory sits before it’s sold. This is the inventory holding period, which is linked to how quickly stock turns over. The turnover is typically measured as cost of sales divided by average inventory. The number of days is then 365 divided by that turnover, which simplifies to 365 × (average inventory / COS). When average inventory isn’t available, closing inventory can be used as a proxy, giving 365 × (closing inventories / COS). That’s why the form Inventories ÷ COS × 365 best represents the holding period. It reflects how much stock there is relative to the cost of goods sold and converts that ratio into days. The other options either invert the ratio, use revenue instead of cost of sales, or mix in the wrong basis, which don’t correctly express the days stock remains unsold. For example, if closing stock is 50, COS is 250, the holding period would be about 365 × 50 / 250 ≈ 73 days.