Final answer:
It's true that the inventory turnover ratio indicates a firm's operating efficiency, with faster turns typically revealing effective management in buying or controlling inventory.
Step-by-step explanation:
The statement that the inventory turnover ratio is an indicator of a firm's operating efficiency is true. A higher inventory turnover suggests that a company is selling goods rapidly and that management is effective in managing its stock levels. This ratio compares the cost of goods sold with average inventory during a period, signaling how fast a company's inventory is being sold and replaced.
For businesses, faster inventory turns generally mean better performance, as items are not sitting idle and potentially incurring storage costs or becoming obsolete. However, it is crucial to balance because an excessively high turnover might indicate a shortage that could lead to lost sales. Thus, effective inventory management leads to optimal turnover rates, which reflect good buying decisions and inventory control by management.