Inventory period refers to the average number of days that an item or stock stays in the warehouse before it is sold. This is an important inventory metric in the accounting of a company because it determines the length of period in which inventory stays in storage, hence determining the efficiency of stock management. A higher inventory formula means that the inventory of the company stays longer in warehouse.
The following information relates to Lite Limited for the year ended 31 December, 2009.
KSH
Cost of Goods Sold 360,000
Inventory (1st January, 2009) 48,000
Inventory (31st December, 2009) 51,000
Calculate the inventory period
Inventory period = 365 × (average inventory/cost of goods sold)
Average inventory = (starting inventory + closing inventory)/2 = (48,000+51,000)/2 = 49,500
Inventory period = 365*(49,500/360,000)
Inventory period = 365*0.1375 = 50.19
Therefore, the inventory period for Lite Limited for the year ended 31 Dec 2009 is 50 days
This means that the company’s inventory stayed in the warehouse for an average of 50 days before being sold.
This question was derived from KNEC past papers revision materials for college diploma students, business finance, diploma in business management.
