Which equation correctly computes average inventory used in turnover calculation?

Which equation correctly computes average inventory used in turnover calculation?

• A. Beginning inventory plus ending inventory, divided by 2
• B. Beginning inventory minus ending inventory
• C. Purchases plus beginning inventory
• D. Ending inventory plus purchases

Answer: (A)

Average inventory for a period is the mean of the stock at the start and at the end: (beginning inventory + ending inventory) / 2. In turnover calculations, you divide cost of goods sold by this average inventory to measure how many times the stock turned over during the period. Using the average smooths out seasonal swings and gives a more representative stock level than a single endpoint. The other forms don’t produce an average. Subtracting ending from beginning yields the change in inventory, not the stock level used for the denominator. Adding purchases to beginning or ending inventory mixes inflows with existing stock and doesn’t reflect the inventory on hand during the period.

Average inventory for a period is the mean of the stock at the start and at the end: (beginning inventory + ending inventory) / 2. In turnover calculations, you divide cost of goods sold by this average inventory to measure how many times the stock turned over during the period. Using the average smooths out seasonal swings and gives a more representative stock level than a single endpoint.

The other forms don’t produce an average. Subtracting ending from beginning yields the change in inventory, not the stock level used for the denominator. Adding purchases to beginning or ending inventory mixes inflows with existing stock and doesn’t reflect the inventory on hand during the period.