Many analysis just take the beginning of year inventory and end of year inventory found on the balance sheet, and judge the midpoint as the average. One method is to take inventory at the end of every month and then divide the sum by 12 to approximate an average.

Average Inventory: This is the average value of the inventory for a given period of time.For a company reselling items, the COGS is the wholesale cost of goods. A company manufacturing its own products would include materials and labor. Cost of Goods: The production costs of goods sold.Inventory Turnover Ratio = COGS / Average Inventory COGS are found on the income statement, and the average inventory will be found on the balance sheet. The data is derived from the financial statements of the company. In the formula, the COGS is divided by the average inventory to determine how many times the inventory was turned over. The inventory ratio uses the cost of goods sold (COGS) and average inventory value to get the ratio. It is an efficiency ratio that helps a company measure its ability to use assets to generate income. Businesses use the inventory turnover ratio to help with pricing, manufacturing, and purchasing inventory. The inventory turnover ratio indicates to an investor how often a company sells its inventory, meaning how fast product moves off the shelves. Luis Alvarez/DigitalVision via Getty Images What Is the Inventory Turnover Ratio?

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