Which formula correctly defines Inventory Days in the working capital days ratios?

Which formula correctly defines Inventory Days in the working capital days ratios?

• A. Ending Inventory / COGS * Number of Days of COGS
• B. Ending Inventory / Sales * Number of Days in Period
• C. Beginning Inventory / COGS * 365
• D. Ending Inventory / Avg Inventory

Answer: (A)

Inventory days translate how long the on-hand inventory would last during the period by tying the level of inventory to the cost of goods sold and scaling by the period length. Using ending inventory as the on-hand amount, dividing by COGS gives a fraction of the period that inventory represents in cost terms, and multiplying by the number of days in the period converts that fraction into days. So ending inventory divided by COGS, then times the number of days (for a year, 365), yields the approximate number of days of inventory outstanding. The other options misalign with this concept: using sales instead of COGS changes the basis from cost to revenue; using beginning inventory shifts the measure to the start of the period rather than what ends up on hand; and ending inventory divided by average inventory produces a ratio, not a days measure.

Inventory days translate how long the on-hand inventory would last during the period by tying the level of inventory to the cost of goods sold and scaling by the period length. Using ending inventory as the on-hand amount, dividing by COGS gives a fraction of the period that inventory represents in cost terms, and multiplying by the number of days in the period converts that fraction into days. So ending inventory divided by COGS, then times the number of days (for a year, 365), yields the approximate number of days of inventory outstanding.

The other options misalign with this concept: using sales instead of COGS changes the basis from cost to revenue; using beginning inventory shifts the measure to the start of the period rather than what ends up on hand; and ending inventory divided by average inventory produces a ratio, not a days measure.