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 formulas is used to calculate the inventory turnover ratio?

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

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

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

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

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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 during a specific period.

Step 2: Identify the correct formula for Inventory Turnover Ratio. The formula is: \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \). This formula uses Cost of Goods Sold (COGS) and Average Inventory to calculate the ratio.

Step 3: Clarify why other formulas are incorrect. For example, \( \frac{\text{Cost of Goods Sold}}{\text{Net Sales}} \) is not valid because Net Sales is not directly related to inventory turnover. Similarly, \( \frac{\text{Net Sales}}{\text{Ending Inventory}} \) and \( \frac{\text{Gross Profit}}{\text{Average Inventory}} \) do not accurately represent the relationship between inventory and sales or costs.

Step 4: Break down the components of the correct formula. \( \text{Cost of Goods Sold} \) represents the direct costs of producing goods sold by the company, and \( \text{Average Inventory} \) is calculated as \( \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \).

Step 5: Explain the practical application of the formula. A higher Inventory Turnover Ratio indicates efficient inventory management, while a lower ratio may suggest overstocking or slow-moving inventory.