Day Sales of Inventory (DSI): Formula & Examples

Instructor: Darlisha Oliver
Companies purchase inventory to sell at a profit. In this lesson we will discuss the days' sales of inventory formula and how it allows a business to monitor the length of time selling the items in its inventory takes.

Days' Sales of Inventory

The manager of a supermarket needs to know how long perishable items in the produce section remain in the store before they are sold. A pharmacy needs to know how long certain medicines sit on the shelf before they are sold. It is important for every business to be able to analyze the average amount of time necessary to sell its inventory. Some goods expire and are unable to be used after a certain amount of time. Managers use the days' sales in inventory (DSI) ratio to assess the average amount of time for the company to sell its inventory.

Days' sales of inventory is an important part of proper inventory management. Managers want inventory to move fast so they can use the cash from sales on other business expenses. They also want to decrease the chances of inventory getting too old to use or sell, which cost the company money. Managers also must know when purchasing new inventory items is necessary to keep the business operating smoothly.

Days' Sales of Inventory Formula

To calculate days' sales of inventory, you must consider the company's ending inventory and cost of goods sold. Ending inventory is located in the current assets section of the balance sheet. Cost of goods sold is located on the company's income statement. The formula used to calculate days' sales of inventory is shown below:

Days Sales of Inventory = (Ending Inventory / Cost of Goods Sold) x 365

In this formula, ending inventory is divided by cost of goods sold. Then you multiply this number by 365. This formula calculates the average number of days inventory remained in stock over a one-year period. If you want to calculate days' sales in inventory for a period other than one year, multiply by the number of days in that period. You also must use the ending inventory and cost of goods sold figures for that period. The ending inventory figure located on the company's balance sheet represents the balance in the inventory account at the end of the period. The cost of goods sold figure found on the company's income statement represents the cost of each item sold during the period.

Example 1

The managers at Bob's Furniture Company are interested in finding out how long its inventory remains in the store before it is sold. The company's ending inventory for the year ending December 31, 2015 is $15,000. The cost of goods sold for the year is $40,000. Let's calculate days' sales of inventory below:

Days' Sales of Inventory = ($5,000 / $40,000) x 365
Days' Sales of Inventory = .125 x 365
Days' Sales of Inventory = 45.62

The furniture at Bob's Furniture Company remains in stock for about 46 days before being sold. The managers at Bob's furniture should use this information to make sure new merchandise is getting delivered to the store every 46 days.

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