What method is used to calculate the number of days inventory is held before it is sold?

To determine the number of days inventory is held before it is sold, the method involves calculating the inventory turnover ratio and then converting that figure into days. The inventory turnover ratio indicates how often a company's inventory is sold and replaced over a period, typically a year.

By taking 365 days and dividing it by the inventory turnover ratio, you obtain the average number of days inventory is held before it is sold. This approach effectively translates the turnover rate into a time frame, providing insight into how efficiently inventory is being managed.

For instance, if a business turns over its inventory 10 times a year (an inventory turnover of 10), the calculation would be 365 / 10, which equals 36.5 days. This means that, on average, the business holds its inventory for 36.5 days before it is sold.

This method is preferred because it directly relates the inventory turnover measure to the time dimension, giving a clear indication of inventory holding periods, which is crucial for effective inventory management and cash flow planning.