Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Inventory Turnover

Financial Accounting

14. Financial Statement Analysis

Ratios: Inventory Turnover

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Multiple Choice

Which of the following formulas is used to calculate a company's inventory turnover ratio?

\( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \)

\( \text{Inventory Turnover Ratio} = \frac{\text{Gross Profit}}{\text{Average Inventory}} \)

\( \text{Inventory Turnover Ratio} = \frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \)

\( \text{Inventory Turnover Ratio} = \frac{\text{Net Sales}}{\text{Ending Inventory}} \)

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Verified step by step guidance

Step 1: Understand the concept of Inventory Turnover Ratio. It measures how efficiently a company manages its inventory by showing how many times inventory is sold and replaced over a period.

Step 2: Recall the correct formula for Inventory Turnover Ratio, which is \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \). This formula is used because it relates the cost of goods sold (COGS) to the average inventory held during the period.

Step 3: Analyze why other formulas provided are incorrect. For example, \( \text{Inventory Turnover Ratio} = \frac{\text{Gross Profit}}{\text{Average Inventory}} \) is invalid because gross profit is not directly related to inventory turnover. Similarly, \( \text{Inventory Turnover Ratio} = \frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \) reverses the relationship, and \( \text{Inventory Turnover Ratio} = \frac{\text{Net Sales}}{\text{Ending Inventory}} \) uses net sales and ending inventory, which are not appropriate for this calculation.

Step 4: To calculate the Inventory Turnover Ratio, gather the values for Cost of Goods Sold (COGS) and Average Inventory. Average Inventory is typically calculated as \( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \).

Step 5: Plug the values into the formula \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \) and simplify to find the ratio. This will give you the number of times inventory is turned over during the period.