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

5. Inventory

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

Which of the following would explain a company's inventory turnover ratio rising from 2.5 to 3.5?

The company purchased more inventory than it sold.

The company overestimated its ending inventory.

The company experienced a decrease in sales while inventory levels remained constant.

The company sold inventory more quickly during the period.

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Verified step by step guidance

Understand the inventory turnover ratio: It measures how efficiently a company sells and replaces its inventory during a given period. The formula is Inventory Turnover Ratio = \( \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \).

Analyze the change in the ratio: The inventory turnover ratio increased from 2.5 to 3.5, indicating that the company is selling inventory more quickly relative to its average inventory levels.

Evaluate the options: Consider how each option impacts the inventory turnover ratio. For example, purchasing more inventory than sold would increase average inventory, potentially lowering the ratio. Overestimating ending inventory would inflate average inventory, also lowering the ratio. A decrease in sales with constant inventory levels would reduce the numerator (COGS), lowering the ratio.

Focus on the correct explanation: The increase in the inventory turnover ratio suggests that the company sold inventory more quickly during the period, as this would increase the numerator (COGS) relative to the denominator (average inventory).

Conclude the reasoning: The correct answer is 'The company sold inventory more quickly during the period,' because this aligns with the observed increase in the inventory turnover ratio.