Question

Why is reduction in the number of days’ sales in inventory a good management policy?

A. Reduction in the number of days’ sales in inventory lowers both your cost of financing the inventory purchases and your cost of storing the inventory.
B. Reduction in the number of days’ sales in inventory is usually an effective way of lowering depreciation expense.
C. Reduction in the number of days’ sales in inventory is directly associated with both an increase in P/E Ratio and an increase in book value per share.
D. Reduction in the number of days’ sales in inventory reduces a company’s bad debt expense as well as the company’s Allowance for Bad Debts as a percentage of ending Accounts Receivable.

Answer 1

A. Reduction in the number of days’ sales in inventory lowers both your cost of financing the inventory purchases and your cost of storing the inventory.

Step-by-step explanation:

The number of days' sales in inventory is basically a ratio represented in number of days which tells about the duration a company takes to sale the inventory. Basically the time duration it holds inventory with itself.

As with decrease in such number of days, it means sales are held more frequently and accordingly since the time to hold is reduced, the finance cost to hold will also reduce, also the cost of storage will also reduce.