Which two methods are commonly used to measure inventory turnover?

Inventory turnover is a key metric used to assess how efficiently a business is managing its inventory. The two methods commonly associated with measuring inventory turnover involve the approaches of First-In, First-Out (FIFO) and Last-In, First-Out (LIFO).

FIFO assumes that the oldest inventory items are sold first, which can provide a more accurate reflection of the actual flow of goods in many industries. This method can show a higher turnover rate in a period of rising prices because it reflects sales of older, potentially less expensive inventory, thus leading to a favorable cost of goods sold and, subsequently, a clearer view of profitability.

On the other hand, LIFO assumes that the most recently acquired inventory items are sold first. In inflationary environments, this results in a lower income tax burden due to higher cost of goods sold, as the more expensive items are considered sold first. This method can reflect a lower inventory turnover ratio if the older inventory is slower to sell.

Understanding these methods is crucial as they impact financial reporting and inventory management strategies. By analyzing turnover through these approaches, businesses can make informed decisions regarding purchasing, pricing, and inventory strategy.

The other answer options represent different concepts or techniques related to inventory management but do not specifically measure inventory turnover rates.