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: Average Days in Inventory

Financial Accounting

14. Financial Statement Analysis

Ratios: Average Days in Inventory

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Multiple Choice

Average days in inventory is calculated as $\frac{365\ \text{days}}{\text{Inventory Turnover Ratio}}$. What does the denominator represent in this formula?

Gross Profit Margin

Current Ratio

Inventory Turnover Ratio

Accounts Receivable Turnover

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Verified step by step guidance

Understand the formula for Average Days in Inventory: $ \text{Average Days in Inventory} = \frac{365\ \text{days}}{\text{Inventory Turnover Ratio}} $. This formula calculates the average number of days inventory is held before being sold.

Identify the denominator in the formula: $ \text{Inventory Turnover Ratio} $. This ratio measures how many times inventory is sold and replaced during a specific period, typically a year.

Clarify the meaning of Inventory Turnover Ratio: It is calculated as $ \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} $. This indicates the efficiency of inventory management and sales performance.

Relate the Inventory Turnover Ratio to the Average Days in Inventory: A higher Inventory Turnover Ratio means inventory is sold more frequently, resulting in fewer average days in inventory. Conversely, a lower ratio indicates slower inventory movement and more days in inventory.

Compare the denominator to other financial metrics mentioned: Gross Profit Margin, Current Ratio, and Accounts Receivable Turnover are unrelated to inventory turnover. The correct denominator in this formula is the Inventory Turnover Ratio, as it directly measures inventory activity.