ACCA Financial Management (F9) Certification Practice Exam

How is Inventory Turnover calculated?

1. Cost of Sales / Average Inventory

2. Average Inventory / Cost of Sales

3. Sales Revenue / Average Inventory

4. Cost of Goods Sold / Ending Inventory

The correct answer is: Cost of Sales / Average Inventory

The calculation of Inventory Turnover is fundamentally aimed at measuring how many times a company's inventory is sold and replaced over a specific period. It is an important metric because it helps assess the efficiency of inventory management. The formula for Inventory Turnover is predominantly defined as the Cost of Sales (or Cost of Goods Sold) divided by Average Inventory. This relationship illustrates how effectively a company utilizes its inventory to generate sales, indicating the number of times inventory is sold during a specific timeframe. Using the Cost of Sales in the numerator provides a clear picture of inventory management efficiency, as it focuses specifically on the direct costs associated with the goods sold. By utilizing Average Inventory in the denominator, the calculation accounts for fluctuations in inventory levels over time, making this measure more stable and reflective of the business's operational efficiency. In contrast, the other choices either misrepresent the relationship of the relevant components or use incorrect components for the calculation. For example, using Average Inventory as the numerator or Sales Revenue does not accurately reflect the cost efficiency concerning inventory management, thereby failing to provide meaningful insights into inventory turnover rates.