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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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An increasing inventory turnover ratio indicates that a company:

a. has reduced the time it takes to purchase and sell inventory.

b. is having trouble selling its inventory.

c. may be holding too much inventory.

d. has sold inventory at a higher profit.

To determine

Concept introduction:

Inventory Turnover Ratio:

Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:

Inventory Turnover Ratio=Cost of goods soldAverage inventory

Note: Average inventory is calculated with the help of following formula:

Average inventory=(Beginning inventory + Ending inventory)2

To choose:

The true statement regarding increasing inventory turnover ratio.

Explanation

Explanation for Correct answer:

a. Increasing inventory turnover ratio indicates that the company has reduced the time it takes to purchase and sell inventory.

Hence it is the correct answer.

Explanation for incorrect answers:

b. Increasing inventory turnover ratio indicates that the company has reduced the time it takes to purchase and sell inventory...

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