Inventory is an essential account to maintain exact information of a company’s financial statements. The average inventory is used in numerous financial ratios like the cost of goods sold. Analysts base the parts of their analysis of an organization by using these financial ratios which makes the need for knowing exact inventory volume information important for investors. Calculating average inventory is very important. In this article you will get to know how to calculate average inventory.
Steps to calculate average inventory
- Decide the technique for calculating the inventory on the balance sheet and income statement. There are two ways that can be used for this process. The first way is to take note of the inventory at the starting point of the year and then the ending point of the year. The other way is to keep a monthly record of total inventory till the end of the year.
- Compute the average inventory depending upon the starting and ending inventory. Find out the value of your inventory on day one of the year and on the ending date of the year. Some up these figures obtained together and divide the new figure obtained by two. The result, you will find now, will be the average inventory for the year. This is the first way that can be used to calculate average inventory. It acts well for companies with very little fluctuation in inventory in the whole duration of the year.
- Find out the value of inventory on the final day of each month, if you are using the monthly total method to calculate your average inventory. For your first measurement, it will be the first day of the year and after that it will be the last day of the month for each month. This step is the first stride of a second method which is a better illustration of average inventory for companies with large fluctuation in inventory from month to month.
- Sum up the figures you have obtained and you have recorded. This total would be divided by 13.
- The result you will obtain by this calculation is your average inventory.
Tips and warnings
- If your inventory fluctuates largely in the duration of a year then the monthly recording method of measuring your average inventory can give you the exact total. If your inventory total has a little fluctuation then the calculation depending upon starting and ending inventory for the year should be correct. The reason for the total to be divided by 13 is that there is one measurement at the end of each month which is added to your starting inventory which was the measurement on the first day of the year.
- If you change your way of calculation for your account for average inventory from one year to the next then this change must be noted on your balance sheet and other financial statements so that investors become aware of the change and it could be based on the way used along with changes in inventory volume.
To know how to calculate average inventory is important if you are running a company or an organization of your own as through this you can keep a record of your company’s financial situation. I hope this article would have been beneficial for you in calculating average inventory.
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