Why is "inventory turns" an important metric?
Select an answer:
It determines your cost of goods sold.
This metric determines your revenues/sales for the quarter.
It shows how well you are using the money you invested in inventory.
It is reflected directly on the income statement.
Answers
Inventory turns compare the cost of sales to the average inventory value, generally over a year's time. The inventory turns calculation is: This is a very simple metric used by many companies to measure how well inventory performs against the cost of sales.
Answer:
It shows how well you are using the money you have invested in inventory.
Explanation:
The money invested in inventory, forms a very large part of total costs involved in conducting the business. Inventory turns is an indicator of how efficiently the inventory is managed. In simple terms it is the number of times the inventory is sold in a given time period. It can be arrived at by dividing the cost of goods sold by the average inventory cost for the given period.
Thus a higher number of inventory turns means a smaller inventory and a lower investment in inventory i. e. Lesser money blocked in Inventory as also a faster recovery of the money that is blocked in inventory.
All this boils down to how the purchase prices are negotiated, how well the lead times and reorder levels are managed, how well the inventory acquisition and carrying costs are managed and how efficiently the supply chains are managed by the business.