Question

A ___________ inventory turnover ratio may result in a reduction in storage and obsolescence costs as well as reduced borrowing.

1) higher
2) negative
3) lower

Answer 1

A higher inventory turnover ratio may result in a reduction in storage and obsolescence costs as well as reduced borrowing.

Step-by-step explanation:

The correct answer is higher. A higher inventory turnover ratio means that a company is selling its inventory more quickly, which can lead to several benefits.

Firstly, it can reduce storage costs because there is less need for large warehouses to store excess inventory. Secondly, it can reduce obsolescence costs because items are being sold before they become outdated. Finally, a higher inventory turnover ratio can also lead to reduced borrowing because the company is generating more cash from sales.

For example, if a company has an inventory turnover ratio of 5, it means that the company is selling and replacing its entire inventory 5 times in a given year.