BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Higher markup a business is able to achieve on its product
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Lower investment in inventory for a given level of sales
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Higher investment in inventory for a given level of sales
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Inefficiency in inventory management
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Detailed explanation-1: -Inventory turnover is the rate that inventory stock is sold, or used, and replaced. The inventory turnover ratio is calculated by dividing the cost of goods by average inventory for the same period. A higher ratio tends to point to strong sales and a lower one to weak sales.
Detailed explanation-2: -Interpretation of Inventory Turnover Ratio It is important to achieve a high ratio, as higher turnover rates reduce storage and other holding costs. It is vital to compare the ratios between companies operating in the same industry and not for companies operating in different industries.
Detailed explanation-3: -The higher the inventory turnover, the better, because it indicates that a company is selling things swiftly and that there is significant demand for its products. A low turnover ratio, on the other hand, is a sign of sluggish sales and falling demand for a company’s goods.
Detailed explanation-4: -Low inventory turnover is when stock items are slow at moving through the business, e.g. stock items sit on your shelves for longer than they should, affecting cash flow and increasing carrying costs.