Managing Inventory Control and Procurement

Calculating Days of Inventory on Hand

There are two approaches to use to find the days of inventory on hand. If you select the first method, divide the average inventory for the year or other accounting period by the corresponding cost of goods sold (COGS); multiply the result by 365. The cost of goods sold is reported on the firm's income statement. Compute the average inventory by adding the amount of inventory at the end of the previous year to the value of inventory at the end of the current year and dividing by two.

Inventory figures are stated on the company's balance sheet. Suppose the company reports COGS of $2.5 million and an average inventory of $250,000. Divide $250,000 by $2.5 million, and multiply by 365. You have 36.5 days of inventory on hand.