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CFA Level I · CFA Level I Exam · Analysis of Inventories

An analyst reports the following for a company: cost of goods sold of 840,000 and inventory of 120,000 at the beginning of the year and 160,000 at the end of the year. Using average inventory, the inventory turnover is closest to:

Inventory turnover is 6.00 times. Average inventory is 140,000, the mean of the opening 120,000 and closing 160,000, and cost of goods sold of 840,000 divided by that average gives 6.00. Using only the ending or only the beginning balance would give a different figure.

  1. A5.25 times
  2. B6.00 timesCorrect
  3. C7.00 times

Explanation

Average inventory = (120,000 + 160,000)/2 = 140,000. Turnover = 840,000/140,000 = 6.00. Using only ending inventory gives 5.25, and using only beginning inventory gives 7.00, so both use the wrong base.

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