Which is more accurate and appropriate:

CFA Level II
#1

Which is more accurate and appropriate: Inventory Turnover = Sales / Inventory OR Inventory Turnover = COGS / Average Inventory

#2

COGS/Inv. that’s what is present on the Pg 1 of the FRA book soon after the index and table of contents…

#3

I will take the 2nd one to be more appropriate. 1. In the numerator, it has COGS vs Sales. Though Sales is a good proxy for COGS, but this will always give a higher Inventory turnover than it is actually there. 2. In the denominator, we could use ‘Ending Inventory’ instead of ‘Average Inventory’, but what if, we have purchased lot of inventory just before the year end? that will overestimate the yearly inventory. In my view, as a manager in that company and being an inside person, we would know what exactly is the most appropriate way of calculating this turnover, but as an outside analyst, having limited information on that company’s operations, option 2 would be safer and broader.