🤔 How is INVENTORY TURNOVER linked to COST OF GOODS SOLD? Is COST OF REVENUES the same? ⬎
📦♻️ Inventory Turnover is the number of times a company sells and/or replaces its stock of goods in a given period
➗ It’s calculated as Cost of Goods Sold divided by the Average Inventory Balance
🧩 This is because, generally speaking, Cost of Goods Sold is intended as a part of the outstanding inventory that is used when a Sale occurs
🧮 Therefore, Cost of Goods Sold – that comprises direct material, direct labor and other manufacturing overhead, or only the stocked goods if it’s a retailer – does not correspond to the payment of those costs mentioned above, but is instead the portion of those expenses that, after being recorded under “Inventory”, are written off from it and become “Cost of Goods Sold”, so that it’s possible to calculate the Gross Profit as a difference between Revenues and Cost of Goods Sold
🔎 While in theory it makes total sense, it’s better to analyze the accounting methods of the company to verify how Cost of Goods Sold is recorded in relation to the Inventory
📝 Sometimes Cost of Goods Sold and Cost of Revenues (or even Cost of Sales) are used as synonyms, but the latter could include also shipping costs, marketing activities, commissions paid to sales employees, etc.
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