Average Inventory
What is Average Inventory?
Average inventory is the average level of inventory over a period of time.
![ai 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-1.jpg)
How it Works
A business shows closing inventory levels in the balance sheet at period-end.
![ai 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-2.jpg)
This valuation is used when calculating the cost of goods sold (C.O.G.S)
![ai 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-3.jpg)
Sometimes, management will want to compare closing inventory levels over time.
![ai 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-4.jpg)
They may need to know this for financing purposes.
![ai 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-5.jpg)
The business will require a certain amount of inventory to support sales.
![ai 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-6.jpg)
So they will require a certain amount of finance to cover the cost of inventory.
![ai 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-7.jpg)
When ascertaining their finance requirements, the business will examine current inventory.
![ai 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-8.jpg)
The problem is, they can’t always rely upon closing inventory of just one period.
![ai 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-9.jpg)
Inventory may have been drawn down toward the close of the period.
![ai 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-10.jpg)
Or it may have suddenly spiked up due to a large supplier delivery.
![ai 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-11.jpg)
So they need to calculate what inventory is over time or average inventory.
![ai 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-12.jpg)
Calculating Average Inventory
To calculate average inventory, you find the average of all closing inventories in the series.
![ai 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-13.jpg)
You add all inventories together.
![ai 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-14.jpg)
Then divide the total by the number of inventories in the series.
![ai 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-15.jpg)
The result shows average inventory for the period.
![ai 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/ai-16.jpg)
© R.J. Hickman 2020