How is the inventory turnover rate (TOR) calculated?

The inventory turnover rate (TOR) is an important metric used to assess how efficiently a pharmacy or business is managing its inventory. It reflects how many times a company sells and replaces its stock within a given time period, typically a year.

The correct method for calculating the inventory turnover rate is by using the annual purchases at cost divided by the average on-hand inventory. This calculation helps provide a clear picture of how effectively inventory is being used to generate sales. By focusing on annual purchases at cost, it accounts for the actual cost incurred to acquire inventory, which is crucial for understanding inventory management effectiveness.

Using average on-hand inventory in this calculation allows for a more accurate assessment that smooths out any fluctuations throughout the year, rather than just looking at end-of-period inventory. A higher turnover rate indicates efficient inventory management, suggesting that products are selling quickly and that the business is not overstocked.

The other options focus on different calculations that do not directly represent the inventory turnover rate as defined in the context of measuring the efficiency of inventory usage. For example, annual sales divided by average inventory reflects a different perspective on inventory turnover, focusing more on sales rather than costs.