Days Sales in Inventory
What Does Days Sales in Inventory Mean?
Days sales in inventory shows how many days of sales it takes to turnover inventory.
![ds 1.1](https://seeaccountingnow.online/wp-content/uploads/2021/03/ds-1.1.jpg)
How it Works
At any stage during the year, the business will have a certain amount of inventory.
![dsi2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi2.jpg)
This inventory will be continually depleted as it is sold.
![dsi3](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi3.jpg)
At the same time, the business will continually replenish that inventory with fresh purchases.
![dsi4](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi4.jpg)
This means, the business will turn over its inventory, again and again throughout the year.
![dsi5.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi5.2.jpg)
The number of days taken to do this each time is known as days sales in inventory.
![dsi6](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi6.jpg)
Significance of Days Sales in Inventory
Management and analysts use days sales in inventory to gauge the business’s performance.
![dsi7](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi7.jpg)
For example, if days sales in inventory is low, it indicates the business is running efficiently.
![dsi8](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi8.jpg)
A high number would indicate inefficiencies such as higher inventory carrying costs, insurance, rent, and storage costs.
![dsi9](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi9.jpg)
It also means money tied up in inventory is not available for more productive activities.
![dsi10](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi10.jpg)
All of this impacts on a business’s performance.
![dsi 11.1](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi-11.1.jpg)
Calculating DSI
To help them monitor the business’s performance, management and analysts use a formula to calculate D.S.I
![dsi12.1](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi12.1.jpg)
First, you need to calculate the inventory turnover ratio component of the formula.
![dsi13.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi13.2.jpg)
To do this, you calculate average inventory or alternatively just use the closing inventory.
![dsi14.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi14.2.jpg)
Then you divide this by the cost of goods sold for the period.
![dsi15.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi15.2.jpg)
Cost of goods sold shows total purchases of goods for the year.
![dsi16.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi16.2.jpg)
By making this calculation, you will find how many times the inventory was turned over during the year.
![dsi17.2](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi17.2.jpg)
The resulting answer is a decimal known as the inventory turnover ratio.
![dsi18.1](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi18.1.jpg)
Now, you figure out how many days it takes for inventory to turn over.
![dsi19](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi19.jpg)
To do this, you multiply the turnover ratio by 365.
![dsi20](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi20.jpg)
The result will show how many days it took to turn inventory over.
![dsi21](https://seeaccountingnow.online/wp-content/uploads/2020/11/dsi21.jpg)