Final answer:
False. If a company sold its average inventory 6 times during the year, it indicates that the company sold its average inventory once every two months.
Step-by-step explanation:
The statement is incorrect. If a company sold its average inventory six times during the year, it does not mean that the company sold its average inventory once every two months. To determine the frequency of inventory turnover, you divide the number of times the inventory was sold (6) by the average number of times it would be held in inventory during the year. The formula for inventory turnover is usually calculated by dividing the cost of goods sold (COGS) by the average inventory.
For example, if the inventory turnover ratio is 6, it suggests that, on average, the company held its inventory for about two months (12 months divided by 6). This means the inventory turned over once every two months, not once every month, as suggested in the statement. The correct interpretation is that the company takes approximately two months to sell and replenish its average inventory.