Multiple Choice
In computing the inventory turnover ratio, average inventory is computed as which of the following?
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14. Financial Statement Analysis
Ratios: Inventory Turnover
Multiple Choice
In calculating inventory turnover, how is average inventory typically computed when only beginning and ending inventory balances are provided?
A
Average inventory equals .
B
Average inventory equals .
C
Average inventory equals .
D
Average inventory equals .
Verified step by step guidance1
Understand that average inventory is used to smooth out fluctuations in inventory levels over a period, providing a more representative figure for analysis such as inventory turnover.
Identify the two key inventory balances provided: the beginning inventory (inventory at the start of the period) and the ending inventory (inventory at the end of the period).
Recall the formula for average inventory when only beginning and ending inventory balances are available, which is the arithmetic mean of these two values.
Express the formula for average inventory as: \[ Average\ Inventory = \frac{Beginning\ Inventory + Ending\ Inventory}{2} \]
Use this average inventory figure in further calculations, such as computing inventory turnover, to get a more accurate measure of how efficiently inventory is managed over the period.
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