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The average age of inventory is viewed as the average length of time inventory, is held by the firm or as the average number of day’s sales in inventory. Explain.

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Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the-stock is used. This ratio is based on the relationship between cost of goods sold and rage stock kept during the year. It shows the rate with which the stock is turned into sales Lite number of times the stock in turned into sales during the year. In other words, this ratio reveals the average length of time for which the inventory is held by the firm.

Inventory/ Stock Turnover Ratio \(\frac {\textit{Cost of goods sold}}{\textit{Average Stock}} \)

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock

or, Cost of goods sold = Net Sales – Gross Profit

Average Stock = \(\frac {\textit{Opeing Stock + Closing Stock}}{\textit{2}} \)

Average Age of Inventory = \(\frac {\textit{Day in a year}}{\textit{Inventory Turnover Ratio}} \)

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