What is the equation for inventory holding period?

The inventory holding period is a measurement that indicates the average number of days inventory is held before it is sold. The correct equation for the inventory holding period is derived from the relationship between inventory and the cost of sales.

Using the formula, when calculating the inventory holding period, you take the amount of inventory and divide it by the cost of sales, then multiply by 365 to convert it into days. This formula effectively tells you how many days it takes, on average, for inventory to be converted into sales.

The reason this formula is relevant is that it connects inventory levels with the cost incurred to generate those sales, allowing businesses to analyze their operational efficiency regarding inventory management. A shorter holding period is generally better as it indicates that a company is managing its stock efficiently and not tying up excessive amounts of capital in unsold goods.

In contrast, the other choices do not accurately relate to the calculation of the inventory holding period. The equation involving cost of sales in the denominator is crucial because it highlights the velocity at which inventory is sold relative to production costs, providing a clear metric for assessment.