How is the inventory turnover ratio calculated?

The inventory turnover ratio is a critical measure used to assess how efficiently a retailer manages their inventory. This ratio indicates how many times inventory is sold and replaced over a specific period, generally a fiscal year.

The correct option describes the ratio as Net Sales divided by Average Retail Stock. By using this formula, businesses can gauge their sales performance in relation to the amount of inventory they have on hand. A higher ratio signifies effective inventory management and strong sales performance, while a lower ratio may highlight issues such as overstocking, weak sales, or ineffective inventory management practices.

In this context, other options do not pertain specifically to the inventory turnover ratio. For example, Average Retail Stock divided by Net Sales does not provide insight into how effectively inventory is being sold. Similarly, Net Profit divided by Total Assets represents a measure of return on assets rather than inventory management. Option D, which uses Cost of Goods Sold divided by Retail Price, does not connect to the turnover of inventory and instead touches on pricing strategies. Thus, the approach of using Net Sales over Average Retail Stock is the correct method for calculating the inventory turnover ratio, focusing directly on sales efficiency in relation to inventory levels.