What does Days Inventory Outstanding measure?

Days Inventory Outstanding (DIO) is a financial metric that measures how long it takes for a company to sell its inventory. It is calculated by dividing the average inventory during a period by the cost of goods sold (COGS) and then multiplying by the number of days in the period. Essentially, this measure tells businesses how many days, on average, their inventory remains unsold before it is sold or turned into sales revenue. A lower DIO indicates efficient inventory management and quicker sales cycles, while a higher DIO suggests that items are taking longer to sell, which could lead to increased holding costs and potential obsolescence of the inventory.

In the context of the other options, the measurement of days spent in collecting receivables pertains to Days Sales Outstanding, which evaluates how efficiently a company collects revenue after a sale. The metric involving how long a company takes to pay off debt relates to other financial ratios, such as the payables turnover ratio. Lastly, days spent on selling accounts receivable involves assessing the sales cycle regarding credit transactions but is not relevant to inventory management. These distinctions clarify why measuring days inventory remains unsold accurately defines Days Inventory Outstanding.