CFA Level IFinancial Statement AnalysisMedium
A company reports cost of goods sold of $900,000 for the year. Beginning inventory was $140,000 and ending inventory was $160,000. Using a 365-day year, what is the company's days of inventory on hand (DOH)?
- A73.0 days
- B64.9 days
- C56.8 days
- D60.8 days
Show answer & explanationAnswer & explanation
Correct answer: D. 60.8 days
Average inventory = ($140,000 + $160,000)/2 = $150,000. Inventory turnover = COGS/Average inventory = $900,000/$150,000 = 6.0x. DOH = 365/Inventory turnover = 365/6.0 = 60.8 days.
Why the other options are wrong
- A. This equals 365/5, an incorrect turnover assumption of 5.0x.
- B. This results from an incorrect turnover figure below 6.0x.
- C. This results from using ending inventory only instead of the average inventory.
Days of Inventory on Hand (DOH)
DOH measures the average number of days a company holds inventory before selling it, calculated as 365 divided by inventory turnover.
- Inventory turnover = COGS / Average inventory
- DOH = 365 / Inventory turnover
- Lower DOH generally indicates more efficient inventory management
Memory trick: Turn inventory into turnover, then flip turnover into days.