Some analysts calculate the inventory turnover ratio by dividing sales, rather than cost of goods sold, by the average inventory. Which of the following regarding the inventory turnover ratio is/are not true?
A)Using sales in the numerator, will lead to incorrect measures of the inventory turnover ratio for calculating the average number of days that inventory is on hand until sale.
B)As long as the ratio of selling price to cost of goods sold remains relatively constant, either measure will identify changes in the trend of the inventory turnover ratio.
C)Using sales in the numerator, will lead to correct measures of the inventory turnover ratio for calculating the average number of days that inventory is on hand until sale.
D)Choices a and b.
E)None of the above.

Question

Quizplus · Accepted Answer

Using sales in the numerator does not provide a correct measure for calculating the average number of days inventory is on hand, as the inventory turnover ratio should be based on cost of goods sold to accurately reflect inventory management efficiency.

Some Analysts Calculate the Inventory Turnover Ratio by Dividing Sales