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Ratios: Inventory Turnover quiz #1 Flashcards

Ratios: Inventory Turnover quiz #1
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  • What does the inventory turnover ratio measure in a company?
    The inventory turnover ratio measures how efficiently a company uses its inventory by comparing cost of goods sold (COGS) to average inventory levels.
  • How do you calculate average inventory for the inventory turnover ratio?
    Average inventory is calculated by adding the beginning and ending inventory balances and dividing by two.
  • What is the formula for the inventory turnover ratio?
    The formula is: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory.
  • If a company has a beginning inventory of $50,000 and an ending inventory of $90,000, what is its average inventory?
    The average inventory is ($50,000 + $90,000) / 2 = $70,000.
  • Why is a higher inventory turnover ratio generally considered better?
    A higher inventory turnover ratio indicates more efficient inventory management, meaning fewer resources are tied up in unsold goods.
  • How can benchmarking help when analyzing inventory turnover ratios?
    Benchmarking allows a company to compare its inventory turnover ratio to competitors, helping assess if it is managing inventory more efficiently than others in the industry.
  • If a company has COGS of $200,000 and average inventory of $50,000, what is its inventory turnover ratio?
    The inventory turnover ratio is $200,000 / $50,000 = 4.0.
  • What does an inventory turnover ratio of 4.0 indicate?
    It indicates that the company turned its average inventory into cost of goods sold four times during the period.
  • Why should you use COGS instead of net sales when calculating inventory turnover?
    COGS should be used because inventory and COGS both relate to the cost of goods, while net sales reflect the selling price, not the cost.
  • What could be a risk of maintaining too little inventory, even if turnover is high?
    Maintaining too little inventory could result in stockouts, meaning the company may not be able to fulfill customer orders.
  • If only one inventory balance is provided, how should it be used in the inventory turnover calculation?
    If only one inventory number is given, use it as the average inventory in the calculation.
  • What costs are associated with holding excess inventory?
    Holding excess inventory increases storage and warehouse costs, tying up resources that could be used elsewhere.
  • How does the inventory turnover ratio relate to warehouse efficiency?
    A higher inventory turnover ratio suggests that inventory is moving quickly through the warehouse, reducing storage costs and increasing efficiency.
  • What is the main purpose of analyzing the inventory turnover ratio?
    The main purpose is to assess how effectively a company manages its inventory in relation to its sales and cost structure.