Certified Supply Chain Professional (CSCP) Practice Exam

How is inventory turnover calculated?

1. Annual revenue divided by average inventory

2. Average inventory divided by annual sales

3. Annual cost of goods sold divided by average inventory in dollars

4. Annual sales divided by total expenses

The correct answer is: Annual cost of goods sold divided by average inventory in dollars

Inventory turnover is a vital performance metric in supply chain management that measures how efficiently a company manages its inventory. It reflects how many times a company's inventory is sold and replaced over a specific period, typically a year. The formula for calculating inventory turnover is based on the cost of goods sold (COGS) and average inventory. When calculating inventory turnover, one typically uses annual cost of goods sold divided by average inventory in dollars. This approach provides a clear view of how often inventory is sold and restocked within a given timeframe. It highlights the relationship between inventory levels and sales performance, enabling managers to make informed decisions about purchasing and inventory management. The focus on cost of goods sold, rather than sales or total expenses, offers a more accurate measure of how well the inventory is being utilized to generate revenue, as it directly correlates to the expenses incurred to produce or purchase the goods sold during that timeframe. This method of calculation helps in understanding the efficiency of inventory management and aids in identifying areas for improvement in the supply chain process. Using average inventory gives a more stabilized view, smoothing out any fluctuations in inventory levels that may occur throughout the year. Therefore, this choice aligns with standard financial practices in inventory management and provides a meaningful interpretation of a company's operational