How is Inventory Turns calculated?

Inventory Turns are calculated by dividing the Annual Sales Volume by the number of units in inventory. This formula provides insight into how efficiently a company is managing its inventory. A higher inventory turnover ratio indicates that a company is selling its inventory quickly, which can suggest effective inventory management practices and strong sales performance.

The rationale behind this calculation is straightforward: it represents how many times a company's inventory is sold and replaced over a specific period, typically a year. By using annual sales volume, you account for the total sales made in that timeframe, and dividing it by the average inventory provides a clear metric of turnover. This is particularly important for businesses aiming for optimal inventory levels to avoid overstocking or stockouts.

In contrast, other options do not accurately reflect how inventory turns are defined and measured, as they use incorrect operations or relationships that fail to provide a meaningful turnover metric.