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 best describes how to calculate the annual inventory turnover ratio at a Frito-Lay plant?

Divide total sales by ending inventory.

Divide cost of goods sold by average inventory.

Multiply average inventory by cost of goods sold.

Subtract beginning inventory from ending inventory.

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Verified step by step guidance

Understand the concept of inventory turnover ratio: It measures how efficiently a company uses its inventory to generate sales. Specifically, it shows how many times inventory is sold and replaced during a year.

Identify the correct formula for inventory turnover ratio: The formula is \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \).

Clarify the components of the formula: Cost of Goods Sold (COGS) represents the direct costs of producing goods sold by the company, and Average Inventory is calculated as \( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \).

Explain why dividing COGS by average inventory is appropriate: This calculation reflects how many times the inventory is cycled through (sold and replaced) during the year, which is the purpose of the inventory turnover ratio.

Compare the incorrect options: Dividing total sales by ending inventory, multiplying average inventory by COGS, or subtracting beginning inventory from ending inventory do not align with the definition or purpose of the inventory turnover ratio.