Which formula correctly defines stock turnover and what does it indicate?

• A. Stock turnover = Cost of goods sold / Average stock; indicates how efficiently inventory is used.
• B. Stock turnover = Average stock / Cost of goods sold; indicates inventory depth.
• C. Stock turnover = Ending stock / Opening stock; indicates stock age.
• D. Stock turnover = Net purchases / Average stock; indicates purchasing efficiency.

Answer: (A)

Stock turnover measures how quickly inventory is sold and replaced over a period. The standard formula uses cost of goods sold divided by average stock because COGS captures the true expense of items that left inventory, while average stock reflects the amount of capital tied up in inventory throughout the period. Dividing COGS by average stock gives the number of times the stock is turned over, which directly indicates how efficiently inventory is being used. A higher turnover means faster movement of stock and better utilization of inventory resources.

The other formulas don’t capture the same idea: using average stock over COGS would give a reciprocal metric that isn’t the conventional turnover measure; ending stock divided by opening stock looks at how stock levels changed but not how quickly items were sold; net purchases over average stock focuses on purchasing activity rather than the actual selling rate of inventory.