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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

LO4 Inventory turnover is calculated by dividing cost of goods sold by

  1. (a) average accounts receivable.
  2. (b) average owner’s equity.
  3. (c) average inventory.
  4. (d) accounts receivable turnover.

To determine

Identify the option that is divided by cost of goods sold for calculating inventory turnover ratio.

Explanation

Justification for the incorrect option of (a):

Average accounts receivable is used for calculating accounts receivable turnover ratio. Therefore, it is an incorrect option.

Justification for the incorrect option of (b):

Average owners’ equity is used for calculating return on owners’ equity. Therefore, it is an incorrect option.

Justification for the incorrect option of (d):

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is computed by dividing “the net credit sales by the average amount of net accounts receivables”. Therefore, it is an incorrect option...

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