Which of the following statements is CORRECT?
A) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
B) A reduction in inventories held would have no effect on the current ratio.
C) An increase in inventories would have no effect on the current ratio.
D) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
E) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Holding inventories constant means the denominator in the calculation remains the same, while an increase in sales would increase the numerator. Therefore, the inventory turnover ratio would increase.

Which of the Following Statements Is CORRECT