Explaining Number of Days' Sales in Inventory Calculation
Understanding Number of Days' Sales in Inventory
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.