ABSTRACT
Closing stock, of course, may not be the same as average stock during the year, so the apparent ‘stock turnover’ ratio using end-of-year stock may not represent the real rate of turnover on average. (Moreover, if there are seasonal changes in stock levels, merely averaging the opening and closing year-end figures will not reveal average stock levels during the year.)
Another way to compute this ‘turnover’ ratio is to express closing stock in terms of the ‘number of days’ of cost of sales held, by dividing closing stock by average daily cost of sales:
350 x 365 = 160 days (2004: 151 days)
An increase in stock levels (causing a fall in apparent stock turnover) may result from stocks piling up because of falling sales during the year. Or it may represent a deliberate building-up of stocks to meet planned sales growth in future. In controlling production and stocks, therefore, forecasting the future level of sales volume plays a vital role.
