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

How would you interpret an inventory turnover ratio of 10.7?

The company’s inventory turnover ratio is below industry average, suggesting poor inventory management.

The company has excess inventory and slow sales, as indicated by the high turnover ratio.

The company sells and replaces its inventory approximately 10.7 times per year, indicating efficient inventory management.

The company holds its inventory for about 10.7 years before selling it.

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Verified step by step guidance

Understand the concept of inventory turnover ratio: It measures how many times a company sells and replaces its inventory over a specific period, typically a year. A higher ratio generally indicates efficient inventory management.

Interpret the given ratio of 10.7: This means the company sells and replaces its inventory approximately 10.7 times per year. It suggests that the company has a good balance between inventory levels and sales activity.

Compare the ratio to industry averages: If the ratio is above the industry average, it indicates efficient inventory management. If it is below, it may suggest issues such as excess inventory or slow sales.

Avoid common misconceptions: A high inventory turnover ratio does not mean the company holds inventory for 10.7 years. Instead, it reflects the frequency of inventory replacement within a year.

Conclude the interpretation: Based on the ratio of 10.7, the company demonstrates efficient inventory management, as it is able to sell and replace its inventory multiple times within a year.