Average vs ending inventory.
Average inventory is the default for the turnover formula. Ending inventory is acceptable in steady-state businesses and misleading in seasonal ones.
Sensitivity
Consider a business with $2.4M COGS, $640,000 beginning inventory, $560,000 ending inventory. Average inventory at the two-point method is $600,000; ending is $560,000. Turnover reads 4.0x on the average method, 4.3x on the ending method. The 7 percent difference is the magnitude of the distortion at a flat-ish book.
For a seasonal apparel book that peaks at $1.2M in October and ebbs to $300,000 in February, the average method returns a denominator near $700,000; the ending method on a January close returns $300,000. The turnover ratio on the ending method then reads 2.3 times the average reading.
Auditor preference
Auditors accept either method when consistently applied and disclosed. Switching mid-year requires a footnote and a one-period restatement. Document the choice in the accounting-policy memo.
When ending inventory is fine
- Steady-state distribution books with cyclical variance under 10 percent.
- Subscription-replenishment models where the book runs near flat.
- Quarterly flash reads where the only goal is consistency with the prior quarter.