WHEN THE COST OF SALES IS DIVIDED BY THE AVERAGE STOCK, THE RESULT IS

• A. gross profit
• B. net profit
• C. rate of turnover ✓
• D. working capital

The answer to the question is: C. rate of turnover

When the cost of sales is divided by the average stock, the result is rate of turnover. This calculation provides a measure of how efficiently a company is managing its inventory. The rate of turnover, also known as inventory turnover, indicates how many times a company’s inventory is sold and replaced over a certain period. It is an important metric for assessing the effectiveness of inventory management and the overall operational efficiency of a business.

The formula for calculating the rate of turnover is:

Rate of Turnover = Cost of Sales / Average Stock

Where:

• Cost of Sales: This represents the direct costs attributable to the production of goods sold by a company during a specific period.
• Average Stock: This refers to the average level of inventory held by a company during a particular period.

By dividing the cost of sales by the average stock, businesses can determine how quickly their inventory is being sold and replenished. A high rate of turnover generally indicates that a company is efficiently managing its inventory, while a low rate may suggest overstocking or slow-moving inventory.

Understanding the rate of turnover is crucial for businesses in various industries, as it can help them optimize their inventory levels, minimize carrying costs, and improve cash flow. Additionally, investors and financial analysts often use this metric to evaluate a company’s operational performance and compare it with industry benchmarks.