Question

A reduction in inventory will improve return of equity by: Group of answer choices A. Increasing cash, which will increase asset turnover B. reducing cost of goods sold, which will increase asset turnover C.Increase assets, which will increase asset turnover and profit margin D. Reducing cost of goods sold, which will increase the profit margin

Answer 1

A. Increasing cash, which will increase asset turnover

C.Increase assets, which will increase asset turnover and profit margin

Explanation:

A reduction in inventory will improve business performance by increasing the efficiency of the company..

return of equity (ROE) can be calculated by: net profit/shareholder equity.

where share holder equity can be calculated by company assets minus debts.

Therefore ROE = Net profit/ (Assets - debts)

With, this formula, it can be deduced mathematically that, increasing ROE will Increase profit gain and increase asset turnover.

ROE help company to estimate how management is using company assets to actualize profit. Reducing inventory is a reduction in the cost of procurement of goods needed by the company. this eventually increase the cash income of the company.

Also, a reduction in company debts can drastically improve the ROE.