Multiple Choice
Which of the following best describes how to calculate the annual inventory turnover ratio at a Frito-Lay plant?
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14. Financial Statement Analysis
Ratios: Inventory Turnover
Multiple Choice
Which of the following statements correctly explains what the inventory turnover ratio assesses?
A
It measures how many times a company's inventory is sold and replaced over a period.
B
It shows the percentage of net income generated from total assets.
C
It indicates the proportion of inventory financed by long-term debt.
D
It assesses the average number of days it takes to collect receivables.
Verified step by step guidance1
Step 1: Understand the concept of the inventory turnover ratio. It is a financial metric used to evaluate how efficiently a company manages its inventory by measuring how many times inventory is sold and replaced during a specific period.
Step 2: Compare the given options to the definition of the inventory turnover ratio. The correct explanation should align with the idea of measuring the frequency of inventory sales and replacement.
Step 3: Eliminate options that do not relate to inventory management. For example, options discussing net income from total assets, inventory financed by long-term debt, or receivables collection are unrelated to the inventory turnover ratio.
Step 4: Identify the option that directly corresponds to the inventory turnover ratio's purpose, which is to measure how many times a company's inventory is sold and replaced over a period.
Step 5: Confirm the correct answer by ensuring it matches the definition and purpose of the inventory turnover ratio, which is focused on inventory sales and replacement frequency.
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