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

What does an inventory turnover ratio of 7 times represent?

The company sold and replaced its inventory 7 times during the period.

The company holds inventory for 7 months before selling it.

The company has 7 different types of inventory.

The company’s inventory increased by 7% over the period.

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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 during a specific period, typically a year.

Recognize the formula for inventory turnover ratio: \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). This formula helps calculate the frequency of inventory turnover.

Interpret the meaning of '7 times': If the inventory turnover ratio is 7, it means the company sold and replaced its inventory 7 times during the period. This indicates the efficiency of inventory management.

Clarify why other options are incorrect: Holding inventory for 7 months, having 7 types of inventory, or inventory increasing by 7% are unrelated to the inventory turnover ratio. These options do not align with the definition or calculation of the ratio.

Conclude with the correct interpretation: The inventory turnover ratio of 7 times represents that the company sold and replaced its inventory 7 times during the period, reflecting its operational efficiency.