Different Causes of Negative Inventory Turnover Rate
Computation of the Inventory Turnover Rate is as follows:
[Cost of Sales / Average Inventory Value] = Inventory Turnover Rate
Average Inventory Value =[SUM (on hand value on the last day of each month) / # of months in period]
If either of the Cost of Sales or Average Inventory Value will become negative, the Inventory turnover Rate would become negative.
Following were the causes of the Formula Variables to be negative:
A. Cause of Negative Cost:
1. The cost column on the report refers to the Net Cost of Goods Sold of the Item for the period set on the Report
2. Normal Balance for the Cost of Goods Sold is Debit which we normally encounter on Item Fulfillments' GL Impact. It will become negative if the Credit Postings for the Cost of Sales was greater than its Debit Postings.
3. You may verify this behavior by performing the following:
a. Navigate to Reports > Financial > Income Statement.
b. Click the GL Account used by the Item as its COGS account.
c. On the General Ledger, click Customize.
d. On the Filters sub tab, please expand the Transactions Folder then look for Item and click it to add it as a filter. Note: Please verify that the period used to generate the Inventory turnover report is the same with the General Ledger.
e. Use the Item Name as the filter.
f. Edit the Report Title then click Save.
You may now verify the balance of the COGS account used for the item which must be equal to the Cost on the Inventory Turnover Report. In this case, the COGS account had a credit balance that was why it was negative on the report.
B. Cause of Negative Average Inventory Value:
1. Average Inventory Value =[SUM (on hand value on the last day of each month) / # of months in period]
2. If the On Hand value of an Item was negative on one of the end of the months covered by the period, and there were no on Hand Value on other end of months then the average would normally be negative.
| Causes of negative turnover rate | Related Transactions / Factors | Computation |
| Scenario A: Negative Cost | Transactions were dated for period of December 2017 Item Fulfillment | Debit to Cost of Goods Sold = 100 Journal Entry | Credit to Cost of Goods Sold = 200 |
COST = Net of all COGS recognized in the Date Range set on the Report Filter by which Normal Balance must be Debit COST = (100-200) COST = -100 |
| Scenario B: Negative Average Inventory Value | Location | End of Month | Location Inventory Value Location A | October 2017 | -1000 Location A | November 2017 | 0.00 Location A | December 2017 | 0.00 |
Average Inventory Value =[SUM (on hand value on the last day of each month) / # of months in period] Average Inventory Value =(-1000+0+0) / 3 Average Inventory Value = -1000 / 3 Average Inventory Value = -333.33 |