Question

Which of the following would explain a company's inventory turnover ratio rising from 2.5 to 3.5?

a) The companies cost of goods sold has remained constant while the average inventory has decreased
b) The company's total sales has decreased while the average inventory has remained constant.
c) The company's cost of goods sold has decreased while the average inventory has remained constant.
d) The company's total sales has decreased while the average inventory has increased.

Answer 1

The most plausible explanation for a company's inventory turnover ratio rising from 2.5 to 3.5 is that the company's cost of goods sold has remained constant while the average inventory has decreased (option a).

Step-by-step explanation:

The question relates to the concept of inventory turnover ratio, which is a measure of how quickly a company sells and replaces its inventory over a certain period. A rise in this ratio from 2.5 to 3.5 indicates that the company is turning over its inventory more quickly.

Given the options, the most plausible explanation is option a) which states that the company's cost of goods sold has remained constant while the average inventory has decreased.

This indicates that the company is selling the same amount of goods as before but with a smaller inventory, thus increasing the turnover ratio. It is important to remember that the inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory and hence a decrease in average inventory, with constant cost of goods sold, will result in a higher turnover ratio.