What insights can be gained from inventory ratio analysis, such as inventory turnover ratio and number...

What insights can be gained from inventory ratio analysis, such as inventory turnover ratio and number of days’ sales in inventory ratio?

Expert Solution

Following are the insights that can be gained from inventory ratio analysis -

Inventory Write Off period - Inventory Write-Off or Stock Write-Off means that inventory held by the business entity has no value in the business and required to be written off in the books of accounts. Inventory could be written off due to damage in inventory, theft, change in market trend or obsolescence technology. This is to be done periodically and in a systematic manner. Thus inventory write-off period is an insight that can be gained from inventory ratio analysis.
Cost of Holding the inventory - There is cost to be incurred by a business in holding, storing and maintaining of inventory. This generally includes expense of rent paid for storage area, opportunity cost of utilising the owned area currently used for storing the inventory, security expense and insurance on stock.Thus, cost of Holding the inventory is an insight that can be gained from inventory ratio analysis.
Inventory Turnover Ratio - (as mentioned in question)
Number of days’ sales - (as mentioned in question)

ekkarill92 answered 2 years ago

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