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 statements about the inventory turnover ratio is correct?

A higher inventory turnover ratio generally indicates that a company is selling inventory more quickly.

The inventory turnover ratio is calculated as Cost of Goods Sold divided by Total Assets.

A low inventory turnover ratio always means a company is highly profitable.

The inventory turnover ratio is not useful for comparing companies within the same industry.

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Verified step by step guidance

Understand the concept of the inventory turnover ratio: It measures how efficiently a company sells and replaces its inventory over a specific period. The formula is typically Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory.

Analyze the first statement: 'A higher inventory turnover ratio generally indicates that a company is selling inventory more quickly.' This is correct because a higher ratio suggests efficient inventory management and faster sales cycles.

Evaluate the second statement: 'The inventory turnover ratio is calculated as Cost of Goods Sold divided by Total Assets.' This is incorrect because the inventory turnover ratio is calculated as Cost of Goods Sold divided by Average Inventory, not Total Assets.

Assess the third statement: 'A low inventory turnover ratio always means a company is highly profitable.' This is incorrect because a low inventory turnover ratio often indicates slow-moving inventory, which can lead to higher holding costs and reduced profitability.

Review the fourth statement: 'The inventory turnover ratio is not useful for comparing companies within the same industry.' This is incorrect because the inventory turnover ratio is particularly useful for comparing companies within the same industry, as it provides insights into operational efficiency relative to peers.