Let us consider Company A and Company B as part of this discussion. To understand the formula better, let us consider few examples. We need to take an average of closing inventory as at current period-end and previous period-end.Average inventory can be obtained from the Balance Sheet.Indirect expenses like Interest expense, Taxes, etc should not be part of COGS.Examples of COGS are Raw material cost, labor cost, and other direct expenses.COGS refers to the costs that are incurred directly as part of the production process.Here is a quick recap of the Inventory turnover ratio formula.īelow aspects need to be considered while calculating the numerator and denominator. On paying close attention, we can see that this formula is inversely related to the inventory turnover ratio formula. We take the Average Inventory in the numerator and Cost of Goods Sold (COGS) in the denominator and then multiply it by 365.Īverage inventory can be obtained from the Balance Sheet and COGS can be obtained from the Income Statement. The formula for Days inventory outstanding is closely related to the Inventory turnover ratio. We will explain the interpretation and reason shortly. Hence, it is not preferred to have very high Days inventory on hand. This represents the opportunity cost of funds. It also indicates the number of days money is blocked in inventories. Days Inventory outstanding meaningĭays Inventory outstanding basically indicates the number of days the company takes to sell its inventory. This ratio is also known as Inventory turnover days, Days sales in inventory, etc. Now, let us look at – Days Inventory outstanding. Days Inventory outstanding or Inventory Days is yet another important activity ratio.Įarlier, we discussed Inventory turnover ratio which indicates the number of times the company turns its inventory during the year.

Cogs meaning