Chapter 8
Inventory Valuation
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indicates that inventory is moving faster at the competitor than at New Tech Mobile. Inventory
that moves fast is less likely to become outdated.
Inventory Days on Hand
There is another way of looking at inventory turnover. Instead of estimating how often a company
sells and replaces inventory over a period of time (which is indicated by the inventory turnover
ratio), turnover can be calculated by estimating how many days it takes to move items out of
inventory. Expressed another way:
inventory days on hand
is a calculation of how many days
inventory will last given the current rate of sales.
The number of days in a year (365) is divided by the inventory turnover ratio, resulting in the
inventory days on hand.
Inventory Days on Hand =
365
Inventory Turnover Ratio
The inventory days on hand carves up the calendar year into equal-sized chunks. The number of
chunks equals the inventory turnover ratio. The size of the chunks translates into the inventory
days on hand.
For example, if a company’s inventory turnover ratio is 10, then inventory is completely purchased
and sold 10 times throughout the year. Since there are 365 days in the year, each chunk is 36.5 days
long.
365 = 36.5
10
Therefore, the inventory days on hand is 36.5 days.This means that on average, it takes 36.5 days
to "turn over" inventory.This is shown in Figure 8.20.
1
2
3
4
5
6
7
8
9
10
1 Year (365 days)
FIGURE 8.20
36.5 days
Returning to the example, New Tech Mobile calculates its inventory days on hand to be 58.9 days
(365 ÷ 6.2). Since its competitor had an inventory turnover of 9.0, the competitor's inventory days
on hand is 40.6 days (365 ÷ 9.0).
Another way of calculating inventory days on hand is shown below.
Inventory Days on Hand = Average Inventory × 365
Cost of Goods Sold
