Average Age Of Inventory

AAA

DEFINITION of 'Average Age Of Inventory'

The average number of days it takes for a firm to sell to consumers a product it is currently holding as inventory. The formula to calculate the average age of inventory is C/G x 365, where C is the average cost of inventory at its present level and G is the cost of goods sold, multiplied by the number of days in a year.

For example, if the inventory is valued at $100,000 and the cost of goods sold is $600,000, the average age of inventory is 60.8 days. That means that, on average, it takes a firm approximately two months to sell a piece of inventory.

Can also be referred to as "days to sell inventory."

INVESTOPEDIA EXPLAINS 'Average Age Of Inventory'

A high average age of inventory can indicate that a firm is not properly managing its inventory or that it has a substantial amount of goods which are proving difficult to sell. Average age of inventory can help purchasing agents make buying decisions and help managers make pricing decisions (e.g. discounting existing inventory to move product and increase cash flow).

The higher a firm's average age of inventory, the greater its exposure to obsolescence risk, the risk that the accumulated products will lose value in a soft market. Average age of inventory is critical in industries with rapid sales and product cycles (such as technology). If a firm is unable to move inventory, it will take an inventory write-off charge, meaning that the products were not equivalent to their stated value on a firm's balance sheet.

RELATED TERMS
  1. Inventory Write-Off

    An accounting term for the formal recognition that a portion ...
  2. Average Inventory

    A calculation comparing the value or number of a particular good ...
  3. Beginning Inventory - BI

    The book value of goods, inputs or materials available for use ...
  4. Ending Inventory

    The value of goods available for sale at the end of the accounting ...
  5. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Investing Basics

    The Working Capital Position

    Learn how to correctly analyze a company's liquidity and beat the average investor.
  3. Fundamental Analysis

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  4. Investing Basics

    Understanding The Cash Conversion Cycle

    Find out how a simple calculation can help you uncover the most efficient companies.
  5. Entrepreneurship

    In Small Business, Success Is Spelled With 5 "C"s

    Incorporating these steps will help your business thrive in a competitive market.
  6. Fundamental Analysis

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  7. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  8. Markets

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  9. Fundamental Analysis

    4 Utility Stocks that May Stay Bright

    With interest rates likely rising in the next year or so, there are a few utility stocks with potential to outperform their peers.
  10. Professionals

    Are Stock Buybacks Always Good for Shareholders?

    Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves.

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!