Explaining Number of Days' Sales in Inventory Calculation

Understanding Number of Days' Sales in Inventory

Number of days' sales in inventory (DSI) is a crucial financial metric that indicates how efficiently a company manages its inventory. It helps in evaluating the liquidity and efficiency of inventory management within a business. The calculation of DSI involves the relationship between the cost of goods sold (COGS) and the average inventory level. The formula for calculating DSI is as follows: DSI = (Cost of Goods Sold / Average Inventory) * 365 days This formula helps in determining the average number of days it takes for a company to sell its entire inventory. A lower DSI indicates that a company is selling its inventory quickly, while a higher DSI suggests slower inventory turnover.

How to Calculate Number of Days' Sales in Inventory

The process of calculating DSI involves dividing the cost of goods sold by the average inventory for the given period and then multiplying the result by 365 days. This method provides a clear picture of how long it takes for inventory to be converted into sales. To better illustrate the calculation, consider the following example: - Cost of Goods Sold (COGS): $500,000 - Average Inventory: $100,000 Using the formula: DSI = ($500,000 / $100,000) * 365 DSI = 5 * 365 DSI = 1825 days In this example, the company takes approximately 1825 days to sell its entire inventory.

Answer to the Question

What is the calculation method for determining the number of days' sales in inventory?

The number of days' sales in inventory is computed as Sales divided by average daily cost of goods sold. Thus, the correct option is c. sales divided by average daily cost of goods sold.

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