DECA Retail Merchandising Practice Exam

How is inventory turnover calculated?

1. COGS / Average assets

2. Total sales / Average inventory

3. COGS / Average inventory

4. Net sales / COGS

The correct answer is: COGS / Average inventory

The calculation of inventory turnover is indeed represented by the formula that divides the Cost of Goods Sold (COGS) by the average inventory. This metric is essential in retail and merchandising as it indicates how efficiently a company is managing its inventory relative to its sales. A higher inventory turnover ratio reflects that a company is selling goods quickly, which suggests effective inventory management and strong sales performance. Using COGS in the calculation provides insight into the cost involved in generating revenue and highlights how well inventory is being utilized to convert stock into sales. Average inventory is used to smooth out fluctuations and provide a more accurate assessment of inventory levels over a period of time. Other options do not represent the correct calculation for inventory turnover. For instance, total sales over average inventory calculates a different metric related to sales efficiency, whereas net sales over COGS does not pertain to inventory management at all. Therefore, option C stands as the correct representation of how to calculate inventory turnover.