Multiple Choice
ABC Company had \$200,000 in Net Sales and Gross Profit of \$80,000. If Inventory had a balance of \$60,000, what is the Inventory Turnover ratio?
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14. Financial Statement Analysis
Ratios: Inventory Turnover
Multiple Choice
Which ratio can provide an indication of the salability of a company's products?
A
Gross Profit Margin
B
Current Ratio
C
Debt-to-Equity Ratio
D
Inventory Turnover Ratio
Verified step by step guidance1
Understand the concept of the Inventory Turnover Ratio: This ratio measures how efficiently a company sells and replaces its inventory over a specific period. It provides insight into the salability of a company's products.
Learn the formula for Inventory Turnover Ratio: The formula is \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). This helps determine how many times inventory is sold and replaced during a period.
Identify the components needed: To calculate the Inventory Turnover Ratio, you need the Cost of Goods Sold (COGS) from the income statement and the Average Inventory, which is typically calculated as \( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \).
Interpret the result: A higher Inventory Turnover Ratio indicates that the company is selling its inventory quickly, which is a positive sign of product salability. Conversely, a lower ratio may suggest slow-moving inventory or potential issues with product demand.
Compare with industry benchmarks: To fully understand the salability of a company's products, compare the calculated Inventory Turnover Ratio with industry averages or competitors' ratios to assess relative performance.
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