Average inventory refers to the average quantity of stock available in a specified period of time.
The purpose of the average inventory formula is to calculate the value of the inventory within that period of time. This is done by finding out the average of the beginning inventory and end, for the accounting period. Understanding average inventory helps businesses determine how much inventory they need to hold at a given point in time.
(Beginning Inventory + Ending Inventory)
Average inventory = ______________________________________________
Number of months in the accounting period
We have created a built-in calculator to help you save time with manual calculations:
Let’s say you want to determine the average inventory value for the first two months of the year. Assume that in January you have $6,000 worth of inventory and in February you have $8,000 worth of inventory. Therefore;
($6,000 + $8,000)
Average inventory = ____________________
Average inventory = $7,000
Understanding the average industry is important when it comes to accounting. Average inventory values are needed for accurate income statements and balance sheets. For companies that sell seasonal goods, their inventory turnover can differ significantly over periods, so averaging over time periods becomes useful to smooth out those differences.
Average inventory figures can be used to compare overall sales volume, enabling companies to detect fluctuations in inventory levels that are unaccounted for and may have occurred due to shrinkage, theft or damaged goods. It can also help to account for expired goods.
Knowing your average inventory is also important because it helps you determine your inventory turnover. Inventory turnover is an important business ratio that measures the number of times inventory is sold or consumed in a given time period. It is important to use average inventory when calculating inventory turnover to smooth out the difference of inventory over the given time period.
There are a few points of contention when it comes to using average inventory;
Despite these challenges, average inventory is still useful when a company needs to compare inventory with revenue. Income statements present revenue both by month and year-to-date. Your accountant can then compare the year-to-date revenue on the income statement to the average inventory balance to determine how much capital was invested to support the level of sales required.
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