Question

A measure useful in evaluating efficiency in the management of inventories:

A.Ratio of Net Sales to Assets

B.Rate Earned on Total Assets

C.Ratio of Fixed Assets to Long-term Liabilities

D.Inventory Turnover

Answer 1

A measure useful in evaluating efficiency in the management of inventories:

Answer: (D) Inventory Turnover

Reason for answer

Inventory Management is one of the most important aspects in business. Inventory is basically the funds that are invested in inventory. We get our fund back only when we sell our product. Inventory turnover ratio tells us how fast a product is sold or how fast inventory is moved from the shelf. A company will earn more when it is able to move its inventory fast.

Let’s understand this with an example.

Say in a store of a Retailer has Cogs of $ 19000 and His opening and closing Inventory value is $ 2700 and $ 4300 respectively.

His Inventory turnover ratio will be

Inventory Turnover Ratio Formula = Cost of Goods sold/Average Inventory

Inventory Turnover Ratio Formula =$19000/$3500

Inventory Turnover Ratio Formula =5.43

So assuming 365 days in a year 365/5.43 is 67 days approx.

This Retailer is able to move his inventory 5.43 times in a year that is he sells his product in around 67 days. If another retailer moves his inventory in say 40 days then we say that other retailer has a better inventory turnover ratio coz he is able to move inventory fast.

Getting back to main answer Inventory Turnover is useful in evaluating efficiency in the Management of Inventory.