Days Inventory Outstanding = (Average inventory / Cost of goods sold) x Days in the period, where
Average inventory = (Beginning inventory + Ending inventory) / 2
Cost of goods sold = Starting inventory + Purchases - Ending inventory
Days in period = the number of days in the period (week/month/quarter/year)
If you’re just starting out your business, you’d value your starting inventory at zero. If your business is established, the value of your starting inventory would be the same as the value of your ending inventory in the previous year. There are three established ways to value inventory, such as FIFO, LIFO, and Average Cost. FIFO, which means first in, first out, assumes the company sells the oldest products first, whereas LIFO, last in, first out, assumes the opposite. The Average Cost is based on the average price of all goods currently in stock. Regardless of the chosen method, the important thing is consistency.