The Inventory Turnover Is Calculated By Dividing Cost Of Goods Sold By

The correct option of this multiple choice question (mcq) is (C), as Inventory Turnover Ratio (ITR) tells us how efficiently the management manages the inventory / stock of the business between opening inventory and ending inventory which are affected by inventory purchases and sales of the business.

The formula to show is given below:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Here Average Inventory (AI) is calculated as shown below:

AI = Beginning Inventory + Ending Inventory / 2

For example, if cost of goods sold is $60,000 and AI is $20,000, then the ratio is 3, which means that the company sells and replaces its stock 3 times during the current accounting cycle. If this ratio will increase in the next accounting cycle, then the company’s management is effectively managing the stock in the upcoming accounting cycle. On the other hand, if this ratio will be below 3, then the management of the company needs to improve its performance in managing inventory to make sales quickly and replaces the entire stock for the specified time.

So, we can say that, if this ratio is high, then it is a good sign for the company and its management, depending upon the particular type of industry in which the business is operating, as they manage the stock well and the company is able to generate revenue by selling merchandise or goods quickly to customers and replaces inventory during the current accounting cycle. Also, if this ratio is low, then it indicates that inventory management of the company is not performing well and as a result, the company faces low sales, may be due to low demand of products or due to low quality of products, and overstock problems. So, the company’s management makes efforts to increase sales and avoid overstock problems.

The other options (A, B and D) are incorrect choices of this mcq here.