Multiple Choice
Inventory turnover measures __________.
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14. Financial Statement Analysis
Ratios: Inventory Turnover
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Inventory turnover is calculated as the average inventory investment divided into which of the following?
A
Total Assets
B
Net Sales
C
Cost of Goods Sold
D
Gross Profit
Verified step by step guidance1
Understand the concept of inventory turnover: Inventory turnover measures how efficiently a company uses its inventory to generate sales. It is calculated by dividing a specific financial metric by the average inventory investment.
Identify the formula for inventory turnover: The formula is \( \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). This formula highlights the relationship between the cost of goods sold and the average inventory.
Clarify why Cost of Goods Sold (COGS) is used: COGS represents the direct costs incurred in producing goods sold by the company. It is the most relevant metric for assessing how inventory contributes to the production and sale of goods.
Eliminate incorrect options: Total Assets, Net Sales, and Gross Profit are not directly related to the calculation of inventory turnover. These metrics serve other purposes in financial analysis but do not measure inventory efficiency.
Conclude that the correct answer is Cost of Goods Sold: By dividing COGS by average inventory, the inventory turnover ratio is calculated, providing insight into how effectively inventory is managed.
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