Question

A firm has an Inventory turnover (IT) of 5 times a year on a cost of goods sold (COGS) of $800,000. If the firm improves the inventory turnover to 8 times a year while the COGS remains the same, which of the following statements is true?

a $100,000 is additionally invested in purchasing stock.

b. $160,000 is released into the working capital.

C. $60,000 is additionally invested into purchasing stock

d. $60,000 is released into the working​

Answer 1

d. $60,000 is released into the working​

Step-by-step explanation:

A high inventory indicates that a company sells its stock many times in a year. It means its costs of managing inventory decreases.

The inventory turnover ratio is calculated as below

=Cost of goods sold/ average inventory

If COGS = $800,000 and the inventory turnover ratio =5,

the average inventory will be

=$800,000 /5

=$160,000

With a turnover of 8, and COGS remain $800,000, average inventory will now be

=$800,000/8

=$100,000

The average inventory will decrease to $100,000 from $160,000 previously.

$60,000 will be released to working capital.