Average Inventory

AAA

DEFINITION of 'Average Inventory'

A calculation comparing the value or number of a particular good or set of goods during two or more specified time periods. Average inventory is the median value of an inventory throughout a certain time period. A basic calculation for average inventory would be:

(Current Inventory + Previous Inventory) / 2

In this example, the current inventory, $10,000, is added to a previous inventory - for example, the inventory on the same day of the previous year, such as $8,000 - and divided by the two balance points, for an average of $9,000 (($10,000 + $8,000) / 2 = $9,000).

 

INVESTOPEDIA EXPLAINS 'Average Inventory'

Because two points do not always accurately represent changes in inventory, average inventory is frequently calculated by using 13 points. For instance, you could use the end of each month over the course of one fiscal year, including the base month. These points are then added together and divided by 13 (the number of points) to determine the average inventory. Another method is to calculate each month's average inventory, adding these figures and dividing by the number of points.

To learn more about average inventory, read Why is it sometimes better to use an average inventory figure when calculating the inventory turnover ratio?

RELATED TERMS
  1. Average Age Of Inventory

    The average number of days it takes for a firm to sell to consumers ...
  2. Inventory

    The raw materials, work-in-process goods and completely finished ...
  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. Operating Cost

    Expenses associated with administering a business on a day to ...
RELATED FAQS
  1. What are some examples of a deferred tax liability?

    In the United States, laws allow companies to maintain two separate sets of books for financial and tax purposes. Because ... Read Full Answer >>
  2. How can the first-in, first-out (FIFO) method be used to minimize taxes?

    The first-in, first-out (FIFO) inventory cost method can be used to minimize taxes during periods of rising prices, since ... Read Full Answer >>
  3. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  4. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  5. How are prepaid expenses recorded on an income statement?

    Prepaid expenses are not recorded on an income statement. When the prepaid expense becomes due, the expense is recognized ... Read Full Answer >>
  6. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... 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. 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.
  3. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  4. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  5. Economics

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
  6. Fundamental Analysis

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  7. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  8. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  9. Investing

    Apple or Google: Which is the Better Bet?

    Apple and Google have made many investors rich since the turn of the century. Which is more appealing going forward?
  10. Economics

    What is Involved in Inventory Management?

    Inventory management refers to the theories, functions and management skills involved in controlling an inventory.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center