Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Inventory Turnover Ratio: one of the many ratios
that a business uses to analyze and improve its
profitability. But sometimes, getting at the numbers
to calculate those ratios is the real challenge.
1
Selling It!
A Look at the
Inventory Turnover Ratio
Here we introduce Nathan Smith—working in a
music store, and getting promoted to Buyer.
Meet Nathan “Nate” Smith
2
The last line provides the incentive for this module.
How can Nate accomplish this?
Nate Smith works for Esperante Music
Sellers (EMS). After four years he’s
learned a lot about the “alternative music”
scene, often visiting backstage at local
concerts and clubs.
Recognizing his expertise, EMS has
promoted Nate to Buyer. In this role, he
Identifies new artists and labels.
Develops relationships with regional
suppliers.
Maintains a “hot inventory” for EMS
stores.
In Nate’s enthusiasm for the company goals, he
wants to start making changes.
Nate’s Better Idea
3
One of Nate’s first actions was
to convince the owner to use
some of the floor space for
three new sections:
Alternative Rock
Hip-Hop/Rap
Latin
But after a few months, Nate noticed that some of the new
sections aren’t selling as well as he’d hoped.
The new sections are music genres not already found
in Esperante’s offerings. (Note that we simply
selected three types of music from a large list of
music types. You can feel free to edit the slides and
substitute your own preferences, if you wish, with no
consequence to the teaching.)
Page 1
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Correct answer is A. See the next slide for an
explanation.
CPS-Q1
Question 1
4
Nate wonders if the new sections are selling better or worse
than the rest of the store. How can he be sure? Which of the
following would be the best course of action?
A. Compare the present inventories with the initial stock
amounts for the new and old sections.
B. Compare the profit from the new sections with that of the
old sections.
C. Survey new customers entering the store.
D. Call a competing music store and see how their sales are
going for these types of music.
Correct answer is A. Nate should inventory the CDs
remaining to determine how many have been sold.
What Should Nate Do?
the present inventories with the initial
 A. Compare
stock amounts for the new and old sections.
5
To better understand the actual sales, the
best thing Nate can do is to compare the
inventories: what’s left versus what was
stocked.
Or even better, what has sold versus what
was stocked.
Comparing “profits” (choice B) won’t enable a good
judgment of the situation because the profit depends
on the selling price (subject to variations in selling
price, specials, discounts, etc) and your cost.
It’s a little late for a customer survey (choice C). And
new customers probably couldn’t give a very
meaningful opinion comparing the new sections with
the rest of the store.
Comparing with other stores (choice D) might be
helpful, but 1) hard data to get, and 2) still not offer
any comparison with the rest of Esperante’s sales.
When compared to the number originally stocked on
the display case, Nate can calculate a “inventory
turnover ratio” for the old sections and the new
sections, as we’ll see. The ratio for the old sections
will at least tell us what Esperante Music expects as
a minimum. Hopefully, the new sections will perform
as good as or better than the old sections’ ratio, that
is, the turnover ratio for the whole store
Page 2
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Sales During a Quarter
6
Nate checked the
numbers on a few
bands…
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
CPS-Q2
Question 2
7
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
B. Three Deuces
C. Raunchy Rockets
Sales Ratio
8
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
 B. Three Deuces
C. Raunchy Rockets
The larger the ratio, the
better the sales!
0.80 > 0.75 > 0.72
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Notice how we start with the known information: the
record of how many we stocked, and the observation
of how many remain. From that we CALCULATE
how many were sold, and then calculate a ratio of
the number sold to the number stocked. Be sure
students understand how we formed the ratio: the
number SOLD to the number STOCKED.
Get the students to discuss: What is a good value for
the ratio? (Ans: A ratio close to 1.00.) We’ll see later
in the lesson that it’s strangely possible for the ratio
to actually be greater than 1.
The correct answer is B. See the next slide for an
explanation.
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 =(0.75)
0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 =(0.80)
0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 =(0.72)
0.72
The correct answer is B. The larger the ratio, the
better the sales.
Be sure students understand that the value 0.80
(think: 80 cents) is greater than the value 0.75
(think: 75 cents), which is greater than the value
0.72 (think: 72 cents). You can also perhaps help by
reminding them how decimal fractions can be
written as regular fractions: 0.8 is the same as 8/10.
Or 0.80 is the same as 80/100. Also, 0.75 is the same
as 75/100, and 0.72 is the same as 72/100. Students
may more readily accept the fact that 80/100 is
greater than 75/100 which is greater than 72/100.
Note: the symbol “>” means “is greater than.”
Conversely, the symbol “<” means “is less than.” If
any students are confused, you can remind them of
the common clue that the taller side of the symbol is
adjacent to the larger value. Reading from left to
right then, “10 > 4” is read “ten is greater than four.”
Page 3
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
And “3 < 9” is read “three is less than nine.”
To expound a little further, in Algebra classes
students will typically see statements like “x < 5,” or
“x is less than five.” While a full treatment is beyond
the scope of this brief note, we can say that the
variable “x” can have any value which would make a
true statement. So we know that values of x like 0, 3,
4, –2, –10, and so forth would all be valid.
Correct answer is B: See next slide for an
explanation.
Question 3
CPS-Q3
9
DownRight was initially stocked
with 24 CDs. After three months,
there are 8 CD’s remaining.
What is the ratio of number sold
to number stocked?
A. 0.33
B. 0.67
C. 0.75
D. 1.33
Sales Ratio
10
DownRight was initially stocked
with 24 CDs. After three months,
Stocked: 24
there are 8 CD’s remaining.
–
Remaining:
8
What is the ratio of number sold
Sold:
16
to number stocked?
A. 0.33
Sold
16
Ratio :

 0.67 (rounded)
 B. 0.67
Stocked 24
C. 0.75
D. 1.33
Correct answer is B.
Number sold = number stocked – number remaining
= 24 – 8 = 16.
So
Ratio = Number sold/Number stocked = 16/24 =
0.66667, or 0.67 (rounded).
Page 4
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Correct answer is C. See the next slide for an
explanation.
Question
CPSQ4 4
11
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
C. 67%
D. 75%
E. 133%
Correct answer is C. Percentage = Ratio  100% =
0.666667  100% = 67% (rounded).
Ratio to Percentage
12
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
Percentage  Ratio 100%
C.
67%
 0.67 100%

 67%
D. 75%
E. 133%
Clarify to students that percentage is really just a
ratio multiplied by 100%. Multiplying by 100%
results in simply moving the decimal point to the
LEFT two places (that’s what happens when we
multiply by 100) and tacking on the percent sign
(because we multiplied by both the number 100 AND
the percent.”%” is like a unit of measure).
We’ve eased into this by using a ratio of the counts of
the CDs—something concrete.
A Better Way
13
We’ve been calculating a ratio based simply
on a count of the CDs.
In reality, the store owner is more interested
in costs and income:
The cost to stock the shelves.
The cost of stock remaining.
The income from sales of those CDs.
Suggestion to help students relate: Bring in a stack
of 24 CD cases (empty or not). State that this is the
band’s starting inventory on the shelf. Now pull CDs
off the stack (i.e., as they “sell”), one at a time, until
only 8 remain. The ratio of number sold to the
number you started with? 16/24 = 0.67
Now, pull out a stack of play money: 24 $1-bills—1
bill for each CD. Remove16 bills, until only 8 remain.
Count them. The ratio of dollars sold to the dollars
you started with: 16/24 = 0.67.
Suppose the bills were each $5 instead of $1; one bill
for each CD as before. The ratio of dollars sold to the
dollars you started with: 80/120 = 0.67.
Suppose the bills were each $10 instead of $1 ; one
bill for each CD as before. The ratio of dollars sold to
Page 5
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
the dollars you started with: 160/240 = 0.67.
The next slide’s notes present one reason why the
costs are preferred over the counts.
Ratio of Costs
Using costs (rather than counts):
14
Ratio 
Cost of Goods Sold
Inventory Cost
where the costs can be calculated:
Cost  Number of Items  Cost per Item
whether it’s cost of items sold, or cost of items in
inventory.
This ratio is known as Inventory Turnover Ratio.
One advantage of using costs is that these numbers
are typically available on the income statement (cost
of good sold) and the balance sheet (cost of
inventory), as we’ll see later.
Note that we’re dealing with YOUR costs here (the
business’s costs), not the customer’s costs (that is,
the selling price). So, it’s important to use YOUR
cost when determining the cost of good sold, and
YOUR cost when determining the cost of the
inventory.
We will eventually be interested in comparing the
ratios. Since the ratios are based on cost of goods
sold, it is important to consider comparable time
periods for the sales data. That is, we obviously
expect the sales data to be different for a week, a
month, a quarter, or a year. So we must be careful to
compare quarterly data with quarterly data, annual
data with annual data, and so forth.
Correct answer is D. See the next slide for an
explanation.
Question 5
CPS-Q5
15
Recall Nate initially stocked 24 of
DownRight’s CDs, and now there are 8 left.
If the CDs cost Nate $4 each, what is
DownRight’s Inventory Turnover Ratio?
A. $4 per CD
B. $3.33
= $4
C. 75%
D. 0.67
Page 6
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Correct answer is D.
Inventory Turnover Ratio
 D. 0.67
16
The ratio is the same as before, because we’ve used
the same cost for the CDs in the numerator and the
denominator of our formula. Later, we’ll see how to
handle costs that vary by item.
The “cost of good sold” is the number sold times
the cost of each: 16 x $4 = $64.
The “inventory cost” is the number stocked times
the cost of each: 24 x $4 = $96.
Thus,
Cost of Goods Sold
Inventory Cost
$64

 0.67 (rounded)
$96
Inventory Turnover Ratio =
Nate Takes Inventory
17
Back to Nate’s problem…We’ve kept the problem
simple for now, in that all CD’s cost the same. So, as
students have just seen, they can use either costs or
counts to calculate the inventory turnover ratio.
Nate’s consults his paperwork from stocking the
shelves with $4 CDs, and also counts the number of
unsold CDs in each section.
Latin :
Stocked: 156
Unsold: 31
Alternative Rock:
Stocked: 262
Unsold: 123
Hip-Hop/Rap:
Stocked: 398
Unsold: 33
The correct answer is D. See the next slide for an
explanation.
CPS-Q6
Question 6
18
Latin: Stocked: 156, Unsold: 31 ($4 ea)
Alternative Rock: Stocked: 262, Unsold: 123 ($4 ea)
Hip-Hop/Rap: Stocked: 398, Unsold: 33 ($4 ea)
What are the inventory turnover ratios for the three
sections, respectively?
A. 0.20, 0.47, 0.08
C. 0.20, 0.13, 0.23
B. 0.31, 1.23, 0.33
D. 0.80, 0.53, 0.92
Page 7
Inventory Turnover Ratio
SLIDE
Inventory Turnover Ratios
 D. 0.80, 0.53, 0.92
19
For each category, calculate the ratio of number
sold to number stocked.
For Latin: Stocked: 156, Unsold: 31 ($4 ea)
Number Sold  Number Stocked  Unsold
 156  31  125
Number Sold
Number Stocked
125

 0.80 (rounded)
156
Inventory Turnover Ratio 
TEACHER NOTES
The correct answer is D, calculated by dividing the
number sold by the number stocked for each section.
We need not bother with including costs here, since
the since the cost for each CD stocked and each CD
sold is the same, and will effectively “cancel.” Later
we will use costs simply because the those figures
are readily available from the business accounting
statements.
Note that we are given the number “unsold,” so we
must first calculate the number sold.
We show the calculation for the Latin CDs in the
slide. The calculations for the remaining two genre’s
are similarly done:
Alternative Rock:
Sold = 262 – 123 = 139;
Ratio = 139/262 = 0.53 (rounded)
Hip-Hop/Rap:
Sold = 398 – 33 = 365;
Ratio = 365/398 = 0.92 (rounded)
Students choosing answer A probably failed to
calculate the number sold, and simply calculated the
ratio of unsold to stocked.
Question 7
CPS-Q7
The correct answer is A. See the next slide for an
explanation.
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
20
Based on the inventory turnover ratios above, which
new section is selling the fastest? Which is selling
the slowest?
A. Hip-Hop/Rap is fastest; Rock is slowest
B. Latin is fastest; Hip-Hop/Rap is slowest
C. Hip-Hop/Rap is fastest; Latin is slowest
D. Rock is fastest; Hip-Hop/Rap is slowest
Page 8
Inventory Turnover Ratio
SLIDE
Inventory Turnover Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
21
A.
TEACHER NOTES
The correct answer is A. The largest ratio (0.92 for
the Hip-Hop/Rap section) indicates the greatest
turnover; correspondingly, the smallest ratio (0.53
for the Alternative Rock section) indicates the least
turnover.
For a sales industry like this, a high turnover is
generally a good thing.
Hip-Hop/Rap is fastest; Rock is slowest
The largest ratio (0.92) indicates the greatest
turnover, or the fastest selling CDs.
The smallest ratio (0.53) indicates the least
turnover, or the slowest selling CDs.
What’s a “Good”
Turnover Ratio?
22
Nate is a little worried about the Alternative
Rock section—at least compared to the
other new sections.
But, how do these ratios compare to the rest
of the store’s CD sales?
To answer that question, he consults
Esperante’s quarterly income statement and
balance sheet.
A Quarterly Inventory
Turnover Ratio
23
From Esperante’s
“financials” for
the last quarter,
Nate finds the
“cost of goods
sold” on the
income statement.
Hmmm…Nate may be in trouble. The Alternative
Rock section has a notably lower inventory turnover
ratio. Since the use of the store’s floor space is
important to the owner, Nate doesn’t want to be
accused of using it inefficiently. Is a ratio around 0.5
unusual for Esperante? Perhaps the situation is
really that the ratios for Latin and Hip-Hop/Rap are
exceptionally good!
One way to answer these questions is to compare to
the ratios for other sales at Esperante.
But Nate doesn’t have time to count the whole
store’s inventory. There is a quicker way…
The Accounting Income Statement includes a report
of the cost of goods sold (or cost of revenue) for the
whole store for some period of time (like a month, or
a quarter, or maybe even a year).
Students need to see that this is equivalent to Nate’s
calculations for his new sections that told him how
much of his inventory had been sold. Help students
find this value on the depicted income statement. We
will use this value in a CPS question, so you can
suggest that they write it down, or for extra
challenge, see if they can find it again on the CPS
question slide.
On this depiction of the Income Statement, the Cost
of Goods Sold is shown as a negative value because it
will decrease the revenues as we work down the
page to reach the net profit (or loss).
Page 9
Inventory Turnover Ratio
SLIDE
A Quarterly Inventory
Turnover Ratio
24
And from
the balance
sheet, he
finds the
inventory
cost (or
value) for
the same
quarter.
TEACHER NOTES
The Accounting Balance Sheet similarly includes a
figure that gives the Inventory cost for the month.
Students need to see that this is equivalent to Nate’s
calculations for his new sections that told him how
much it cost to stock the shelves with his three new
types of music. Help students find this value on the
depicted balance sheet. Since we will use this value
in a CPS question, you can suggest that they write it
down, or for extra challenge, you can see if they can
find it again on the CPS question slide.
On the next slide students will use these figures to
actually calculate Esperante’s Inventory Turnover
Ratio (actually an average for the quarter, since
these figures are quarterly figures).
The correct answer is C. See the next slide for an
explanation.
Question 8
CPS-Q8
What is Esperante’s
Inventory Turnover
Ratio based on the
previous quarter’s
statements?
A. 0.42
B. 0.85
C. 1.17
D. 2.54
25
Esperante’s
Inventory
Turnover
Ratio
26

C. 1.17
Cost of Good Sold $232,710

Inventory Cost
$198,718
 1.17 (rounded)
The correct answer is C. Based on the quarterly
statements, the ratio equals the cost of goods sold
($232,710: found on the income statement) divided
by the inventory cost ($198,718: found on the balance
sheet), or $232,710/$198,718 = 1.17 (rounded).
Students may be puzzled how the ratio could have
value greater than 1. For the Latin CDs on the rack,
the ratio can never be greater than 1. That is, if ALL
of the CDs were sold, then the ratio would be
156/156 = 1.0. However, for the ratio for the store
(using the financial statements), it is possible to
have more sales during the quarter than final
inventory reported on the quarterly statement.
Hence, it is possible to have a ratio greater than 1.
Of course, this suggests that the store had better
quickly do something to restore the inventory to
keep the customers coming!
Page 10
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
The correct answer is A. See the next slide for an
explanation.
Question 9
CPS-Q9
27
Regarding the inventory turns
ratio, which of the following
would the store manager most
like to see?
A. More sales, and a higher
ratio.
B. More sales, and a lower
ratio.
C. More inventory, and a
lower ratio.
D. Less inventory, and a
higher ratio.
Inventory
Turnover
Ratio
 A. More sales, and a
28
higher ratio.
A business always wants
more sales!
More sales will yield a
higher inventory turnover
ratio.
Note: a lower inventory will
also cause a higher ratio.
The correct answer is A. With the plethora of ratios
in use to analyze a business’s financial statements,
each one indicating some aspect of the business’s
health, it’s important that students can discern good
values from bad ones, and better ones from worse
ones. This question gets to the heart of the matter:
what can a business do to improve the indicator
we’ve called the inventory turnover ratio? The
answer is fairly obvious in both a business sense and
a mathematical sense, but it’s important that
students understand the ramifications in any case.
In a business sense, greater sales is always a good
thing (as long as you’re not running low on product
to sell). If you sell more, the cost of goods sold will be
greater. In a mathematical sense, the ratio is a
fraction calculated with a numerator (sales, or cost of
goods sold) and a denominator (inventory). For a
given inventory, the larger the “cost of goods sold,”
the greater the ratio will be. Thus, greater sales and
a greater ratio is the most desirable choice.
Some students may point out that a smaller
inventory will also produce a higher inventory
turnover ratio. Ask them: Which situation would be
better for the business: 1) A comfortable inventory
with high sales, or 2) a low inventory with high
sales? The answer should be the first choice, because
if the inventory is low, the business will not likely be
able to sustain the high sales volume very much
longer.
You can probably make the benefit for a higher ratio
more evident to your students by actually calculating
some ratios. Using Nate’s sales numbers for the
Latin section, for example, the ratio = 125/156 = 0.80
(rounded). Suppose 20 more Latin CDs had sold.
Then. the ratio = 145/156 = 0.93 (rounded). So, the
Page 11
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
ratio is getting larger as more CDs from the
inventory are sold.
Question 10
The correct answer is B. See the next slide for an
explanation.
CPS-Q10
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
29
How do the turnover ratios of Nate’s new sections
compare to Esperante’s quarterly turnover ratio (1.17)?
A. They are all doing better than the rest of the store.
B. None are performing as well as the store average.
C. Latin and Alternative Rock are more popular; HipHop/Rap is worse.
D. Hip-Hop/Rap is a hit; the other two are worse.
Comparing Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
30
 B. None are performing as well as the store average.
All the new types of music have a lower turnover
ratio than the store’s quarterly value of 1.17.
0.53 < 0.80 < 0.92 < 1.17
So, all the new types of music are selling worse
than the rest of the store’s music offerings.
The correct answer is B. The new sections all have a
lower inventory turnover ratio than the store
average of 1.17. Hence we know that the new
sections are not selling as well as the rest of the
store’s selections.
As discussed on a previous slide, the math symbol
here “<” means “is less than.” So, the notation used
here is read “0.53 is less than 0.80 which is less than
0.92 which is less than 1.17.” In other words, the
values are sorted from least to greatest, as we read
the statement from left to right.
To expound a bit more, an equivalent statement can
be formed using the “greater than” symbol:
1.17 > 0.92 > 0.80 > 0.53
from which we could draw the same conclusion: the
Esperante inventory turnover ratio is greater than
any of the three new music sections.
Page 12
Inventory Turnover Ratio
SLIDE
Interpreting the Inventory
Turnover Ratio
31
Should be compared against your industry
averages.
Some businesses have a very high turnover; others
have a very low turnover.
A low turnover ratio generally implies poor sales
and/or large or excessive inventories.
A high ratio implies either strong sales or
insufficient inventories.
TEACHER NOTES
Helps students think through this slide. For
example, you might ask, “Why wouldn’t every
industry strive for the same inventory turnover
ratio?”
Ask: “Mathematically speaking, what would make
the ratio ‘low,’ or ‘small’ in value?” Answer: either a
small numerator (low value for COGS, i.e., sales) or
a large inventory (compared to the sales). Ask: “Can
you think of any industries that have typically large
and/or costly inventories that largely go unsold
month after month?” (Examples: auto dealers,
aircraft manufacturers, distillers, fur goods, heavy
machinery manufacturers, steel industry, wineries,
antique stores, hardware stores.)
Ask: “Mathematically speaking, what would make
the ratio ‘high,’ or ‘large’ in value?” Answer: either
very strong sales (selling almost everything you have
on hand) or insufficient inventories (essentially
always running out of everything). So, while a high
ratio can indicate great sales, it can also be an
indicator of poor planning and lost sales (if you had
more on hand, you could probably sell it, too!). Ask:
“Can you think of any industries that typically have
very rapid turnover of inventories, essentially
clearing the shelves in short order on a regular
basis?” (Examples: fast food industry, baking,
cosmetics, dairy products, meat packing, gasoline
stations, and generally speaking, industries dealing
in perishable goods, and quick consumption, low cost
item industries)
Here’s a helpful listing of typical inventory turnover
ratios for various types of businesses:
http://www.bizstats.com/inventory.htm
Question 11
CPS-Q11
32
The correct answer is B. See the next slide for an
explanation.
In general, which of the
following businesses do you
think would have a relatively
low inventory turnover ratio?
A. Bakery
B. Auto Parts
C. Florist
D. Cellular phone company
Page 13
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Low Inventory
Turnover Ratio

33
B. Auto Parts
A typical automotive parts store has a large
inventory of parts for many different car makes
and models.
The sales rate of any given part is relatively low.
Low sales and large inventory lead to a low
inventory turnover ratio.
Another Comparison
34
When comparing turnover ratios, be sure to
compare like time periods (e.g., monthly
sales, quarterly sales, or annual sales).
To make comparisons easier, a related
measure is often used: Days to Turn the
inventory.
Another easy-to-understand example of low turnover
is the heavy manufacturing industry. Airplane
manufacturers, for example, take months to
assemble an airplane. This means that the cost of all
the goods and manpower required to complete just
one plane must remain unsold for months, creating a
necessarily low turnover ratio.
In contrast, the other choices deal with primarily
perishable or rapidly changing inventory items that
are sold quickly, before they become outdated (as in
the case of technology items, like cellular telephones)
or spoiled (as in the case of food or flowers).
You can demonstrate to students how the annual
sales data will typically be four times as great as the
quarterly sales data, while the average inventory
probably remains approximately the same. For this
reason, the annual inventory turnover ratio will not
surprisingly be about 4 times as great as the
quarterly inventory turnover ratio. We can make
comparisons easier by using the average sales (i.e.,
cost of goods sold) per day. But those ratio values
will be quite small, so we invert the ratio and yield
the number of days to “turn” the inventory. See
further explanation on the next slide.
Average Inventory
Average Cost of Goods Sold per Day
Days to Turn 
Days to Turn Inventory
Average Inventory
Average Cost of Goods Sold per Day
Days to Turn 
35
The correct answer is B. A car dealership typically
has thousands of dollars in inventory sitting on the
shelf, waiting for customers to come in and request
it.
Using Esperante’s quarterly data, calculate Days to Turn.
To get the result in terms of “days,” convert the “quarter of a
year” to days by using unit ratios.
Days to Turn 
$ 198,718
$ 232,710 per qtr
 0.854 qtr

1 yr 365 days

4 qtr
1 yr
 78 days (rounded)
Textbooks often greatly simplify this formula by
assuming that the cost of goods figure is an annual
value. In that case the average cost per day is found
by simply dividing the annual figure by 365 days,
and the formula becomes:
Days to Turn =
Average Inventory * 365/Annual Cost of Goods Sold
This slide shows how students can apply a general
formula for any period of sales data by using unit
ratios to convert the period to days.
Help students see how the units cancel in the
expression on this slide. First, the dollars cancel. So
if inventory happens to be “number of boxes,” or
“pounds of product,” the result will not be correct
because the “number of boxes” or “pounds of product”
will not cancel with the “dollars” associated with the
“cost of goods sold” figure. And similarly, show how
the units of “quarter” cancel, and the units of “year.”
Page 14
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
If necessary, review how the unit ratios are formed
and used: selecting numerators and denominators to
represent equivalent amounts with different units
(that is “1 year” is equivalent to “4 quarters,” “365
days” is equivalent to “1 year,” and so forth). The
choice of numerator or denominator for each
quantity is made such that the units “cancel” (that
is, “qtr/qtr” = 1, “yr/yr” = 1) and we’re left with
“days.”
A possible source of confusion is whether to multiply
by the unit ratio “365 d/1 yr” or “1 yr/365 d.” The
answer is found by discerning which choice would
result in being able to cancel the units we’re trying
to “eliminate”. In our example we first wish to
eliminate “qtr” and, so, multiply by “1 yr/4 qtr”. Next
we wish to eliminate “yr” and, so, multiply by
“365 /1 yr.”
Question 12
CPS-Q12
If Esperante had a “going out of business sale,”
approximately how long do you think it would
take to sell most of it’s inventory
of music?
A. 1 week
B. 1 month
C. 3 months
D. 6 months
E. 1 year
36
Days to Turn Inventory

37
The correct answer is C. See the next slide for an
explanation.
C. 3 months
We calculated that Esperante’s
“days to turn” was 78 days.
That’s a little less than 3 months.
“Days to Turn” is how many
days it takes to sell through
your business’ average
inventory.
The correct answer is C. Obviously, it could take a
little longer than 78 days to actually sell every bit of
the store’s inventory. But for practical purposes, one
could expect that the biggest portion of the store
inventory would be cleared out in about three
months (certainly more than one month, and
probably less than six or twelve months), especially
if there was serious advertising and aggressive
pricing for a “going-out-of-business” sale.
The Days to Turn is a pretty good indicator of the
amount of customer business the store experiences.
Page 15
Inventory Turnover Ratio
SLIDE
Practice Problems
38
Examine the financial data on the following slide
and calculate the inventory turnover ratio and
days to turn for each.
If possible, find up-to-date financial information
on the Internet for these (and other) companies.
For example: http://finance.yahoo.com
Enter the “stock ticker” (or use “Symbol
Lookup”) for the company.
Look for the links to the “financial statements.”
TEACHER NOTES
There’s no better way to make a learning experience
“real-world” than to use real-world data. And there
is plenty of financial data available on the Internet
for real companies. Yahoo! Finance
(http://finance.yahoo.com) is an excellent source for
such financial information on publicly traded
companies. (See notes on next slide also.)
Encourage students to do Internet research on topics
like this (assuming that your school has the
appropriate security filters and pop-up blockers in
place to prevent undesirable results). For example,
students can see if Esperante is performing as well
as other stores that sell music. Below are some
suggested video/music stores they can check, and the
results using the quarterly financial data current
at the time of this writing. It appears that the
quarterly inventory turn ratio for the music/video
industry ranges between 0.5 and 1.5, with the video
stores tending to be higher. (Can you explain why?
Hint: contrast videotape/DVD inventory with
CD/tape/book inventory.) The performance of
Esperante portrayed in this lesson falls about in the
middle of the stores shown below. (In stark contrast,
the quarterly ratio for McDonald's Corp—a very
successful company in a very different industry—is
about 25! They obviously don’t hold onto their
inventory very long!)
Blockbuster Video (BBI):
549,800/408,200=1.35 (68 days per turn)
Borders Group (BGP):
627,300/1,271,700=0.49 (185 days per turn)
Barnes & Noble (BKS):
1,067,978/1,525,834=0.70 (130 days per turn)
Hastings (HAST):
82,426/144,755=0.57 (160 days per turn)
Hollywood Entertainment (HLYW):
164,909/117,610=1.40 (65 days per turn)
Page 16
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Real World Financial Data*
Annual Data
(in thousands)
39
Annual Data
(in thousands)
Safeway Inc (SWY)
Cost of Revenue $25,018,900
Inventory
$2,642,200
Kroger Co (KR)
Cost of Revenue
Inventory
ChevronTexaco Corp (CVX)
Cost of Revenue $72,154,000
Inventory
$2,648,000
Exxon Mobil Corp (XOM)
Cost of Revenue $129,928,000
Inventory
$8,957,000
Home Depot Inc (HD)
Cost of Revenue $44,236,000
Inventory
$9,076,000
Lowes Cos Inc (LOW)
Cost of Revenue $21,231,000
Inventory
$4,584,000
Microsoft Corp (MSFT)
Cost of Revenue $5,686,000
Inventory
$640,000
Apple Computer Inc (AAPL)
Cost of Revenue
$4,499,000
Inventory
$56,000
Wal-Mart Stores Inc (WMT)
Cost of Revenue $198,747,000
Inventory
$26,612,000
Target Corp (TGT)
Cost of Revenue $31,790,000
Inventory
$5,343,000
$39,637,000
$4,169,000
* from Yahoo! Finance
SOLUTION
On this slide we’ve provided you with a nice
collection of real-world financial data from relatively
familiar business names (gleaned from financial
statements available from Yahoo! Finance,
http://finance.yahoo.com, current at the time we
created this presentation). Note that these are
annual figures.
If possible, have students visit the Yahoo! Site and
glean current data from the financial reports for
these companies (and others). The stock market
symbols are provided in parentheses beside each
corporation’s name. At the Yahoo! financial site,
enter the stock market symbol, and then click the
links on the left to the income statement (to find the
cost of revenue—same as “cost of goods sold”) and
the balance sheet (to find the inventory).
You’ll notice that we’ve paired up somewhat similar
businesses so that students can compare the
turnover ratios and the days-to-turn values for
comparable businesses.
Click the “Solutions” button to show the calculated
values (the answers!) for these figures on the next
couple slides, after the students have made their
own calculations. We encourage you to have the
students make their own calculations before
showing the answers.
Students should notice that the ratios and days-toturn values are different for the various industries,
and that they are similar within industries: Safeway
and Kroger (grocery stores); Home Depot, and Lowes
(hardware and building supplies). Of course, there
are some differences within industries, too: notice
Chevron and Exxon. What might explain the
differences? (Perhaps different management
choices?)
Calculating with
Real World Financial Data*
Annual Data
(in thousands)
40
Annual Data
(in thousands)
Safeway Inc (SWY)
Cost of Revenue $25,018,900
Inventory
$2,642,200
Turnover Ratio
9.5
Days to Turn
39
Kroger Co (KR)
Cost of Revenue
Inventory
Turnover Ratio
Days to Turn
ChevronTexaco Corp (CVX)
Cost of Revenue $72,154,000
Inventory
$2,648,000
Turnover Ratio
27.2
Days to Turn
13
Exxon Mobil Corp (XOM)
Cost of Revenue $129,928,000
Inventory
$8,957,000
Turnover Ratio
14.5
Days to Turn
25
Home Depot Inc (HD)
Cost of Revenue $44,236,000
Inventory
$9,076,000
Turnover Ratio
4.9
Days to Turn
75
Lowes Cos Inc (LOW)
Cost of Revenue $21,231,000
Inventory
$4,584,000
Turnover Ratio
4.6
Days to Turn
79
* from Yahoo! Finance
$39,637,000
$4,169,000
9.5
38
MORE
Page 17
Inventory Turnover Ratio
SLIDE
TEACHER NOTES
Calculating with
Real World Financial Data*
41
Annual Data
(in thousands)
Annual Data
(in thousands)
Microsoft Corp (MSFT)
Cost of Revenue $5,686,000
Inventory
$640,000
Turnover Ratio
8.9
Days to Turn
41
Apple Computer Inc (AAPL)
Cost of Revenue
$4,499,000
Inventory
$56,000
Turnover Ratio
80.3
Days to Turn
5
Wal-Mart Stores Inc (WMT)
Cost of Revenue $198,747,000
Inventory
$26,612,000
Turnover Ratio
7.5
Days to Turn
49
Target Corp (TGT)
Cost of Revenue $31,790,000
Inventory
$5,343,000
Turnover Ratio
5.9
Days to Turn
61
Students should notice that the ratios and days-toturn values are different for the various industries,
and that they are similar within industries. Of
course, there are some differences within industries,
too: notice Microsoft versus Apple. Comparable sales,
but very different inventories. And Wal-Mart versus
Target: Wal-Mart is clearly a much larger business,
with the consequence that it can turn its inventory
25% faster than Target stores.
*from Yahoo! Finance
Page 18