Question

The inventory turnover ratio directly measures ______________.

1) the times per period the average inventory balance is sold
2) how many days it takes to collect its sales of inventory sold on account
3) the days it takes to sell its average inventory balance

Answer 1

The inventory turnover ratio measures how often a company sells and replaces its average inventory balance within a period. It reflects the efficiency of inventory management and sales performance but does not relate to the collection of sales on credit or the days required to sell inventory. Option 1.

Step-by-step explanation:

The inventory turnover ratio directly measures the times per period the average inventory balance is sold (1). This ratio is crucial for understanding how effectively a company is managing its inventory and how quickly it can convert products into sales. A high inventory turnover indicates that a company is selling its inventory rapidly and suggests efficient inventory management and strong sales, whereas a low turnover rate may suggest overstocking or weak sales.

The inventory turnover ratio is calculated by taking the cost of goods sold and dividing it by the average inventory for the period. However, it's important not to confuse this with the accounts receivable turnover ratio, which measures how many days it takes to collect on sales of inventory sold on account, or the average number of days it takes to sell through the average inventory balance.