Days inventory outstanding is the average number of days a business holds inventory before selling it, calculated as average inventory divided by cost of goods sold and multiplied by the days in the year, conventionally 365. It is a working capital measure expressed in days rather than dollars, built from two figures already reported on the financial statements. A lower count means the same volume of sales is being supported by less cash sitting on the shelf.
The count is computed from statement information rather than presented on the statements themselves, and the SEC’s own list of the ratios investors calculate that way includes inventory turnover (SEC Beginners’ Guide to Financial Statements). No accounting standard supplies a definition for the days form, so more than one version travels under the name, which is why the version used has to travel with the number.
The Days Inventory Outstanding Formula and Its Two Conventions
DIO = average inventory / cost of goods sold x 365
average inventory = (opening inventory + closing inventory) / 2Average inventory is the balance sheet inventory figure averaged across the period, because the denominator covers a period while the balance sheet reports a snapshot. Cost of goods sold is the cost of what was actually sold in that period, which is not what was bought during it.
Two choices move the answer. The first is which inventory figure goes on top, a two-point average of the opening and closing balances or the closing balance alone. The second is the day count, 365 for a calendar year or 360 where a lender or a contract works on a banker's year. The SEC's guide takes that average by adding the balance for the period of the report to the balance for the previous comparable period and then dividing by two (SEC Beginners' Guide to Financial Statements).
DIO and Inventory Turnover Are One Relationship
inventory turnover = cost of goods sold / average inventory
DIO = 365 / inventory turnoverTurnover counts how many times inventory is sold and replaced across a period, and this measure converts that count into days. The two are reciprocals scaled by the day count, so either can be derived from the other. The SEC’s guide states the turnover ratio as cost of sales divided by average inventory for the period (SEC Beginners’ Guide to Financial Statements).
Where the Two Inputs Come From
The inventory figure is the inventory caption on the balance sheet. On the statements SEC registrants file, Regulation S-X asks for the major classes of inventory to be stated separately where practicable, and requires the basis of determining the amounts to be stated. It also requires the method by which amounts are removed from inventory, for example average cost, first-in first-out or last-in first-out, to be described (17 CFR 210.5-02).
Cost of goods sold is the income statement caption. On those same registrant statements, Regulation S-X captions costs and expenses applicable to sales and revenues, and requires cost of tangible goods sold and cost of services to be stated separately inside it (17 CFR 210.5-03). Only the goods figure belongs in this denominator, so a business selling both has to split the caption first.
The Cost Flow Assumption Moves Both Numbers
The method used to remove amounts from inventory sets the carrying amount left on the balance sheet and the cost charged against sales, so it moves the numerator and the denominator at once. Two counts built on different cost flow assumptions are not comparable. A business on LIFO computes its count off inventory holding its oldest costs while its cost of goods sold carries the newest.
A Worked Example
Say a distributor’s statements for the year carry the figures below.
Cost of goods sold 1,825,000
Inventory, opening 240,000
Inventory, closing 260,000
average inventory (240,000 + 260,000) / 2 = 250,000
DIO, average inventory 250,000 / 1,825,000 x 365 = 50.0 days
DIO, closing inventory 260,000 / 1,825,000 x 365 = 52.0 days
DIO, average inventory 250,000 / 1,825,000 x 360 = 49.3 days
inventory turnover 1,825,000 / 250,000 = 7.3 times
DIO from turnover 365 / 7.3 = 50.0 daysOne set of statements, three answers, and nothing moved but the convention.
What Days Inventory Outstanding Is Commonly Confused With
Days sales of inventory (DSI) and days inventory on hand (DOH) are the same measure under different names.
Inventory turnover is this same relationship expressed in times per period rather than in days.
The operating cycle is this count plus days sales outstanding, so it runs longer whenever a completed sale waits in receivables. The cash conversion cycle takes that same span and subtracts days payable outstanding, so it is not a longer span at all: it falls below this count whenever supplier invoices are held longer than customers take to pay, and below zero whenever they are held longer than inventory and receivables together take to turn into cash.
Common Questions
Divide average inventory by cost of goods sold for the same period, then multiply by the day count used for the year, and state which inventory figure and which day count went into it.
Days sales outstanding (DSO) is the average number of days a completed sale waits in receivables before the cash arrives. Days payable outstanding (DPO) is the average number of days a supplier invoice is held before it is paid. Days inventory on hand (DOH) is another name for this measure, and DIO, DSO and DPO combine in the cash conversion cycle.
The count falls when inventory falls relative to cost of goods sold, and it rises when inventory grows faster than the goods moving out of it. Any operational change reaches the number through one of those two paths. A falling count is not automatically good, since the same movement comes from stock running short.
They measure the same thing in different units. Turnover answers how many times inventory was sold and replaced in the period, and this measure answers how many days one of those turns takes. Dividing the day count by either one gives the other.
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