A small company that trains executives on how to act when working in Japan had $70,000 worth of inventory on January 1, 2018, and it had $50,000 worth of inventory on December 31, 2018.If its cost of services provided for that period was $30,000, and its net profit was $90,000, what was its inventory to turnover ratio?
A)1 time
B)1.5 times
C)2 times
D)3 times
E)9 times

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory for the period. The average inventory is ($70,000 + $50,000) / 2 = $60,000. The COGS for a service company is equivalent to the cost of services provided, which is $30,000. Therefore, the inventory turnover ratio is $30,000 / $60,000 = 0.5. However, the correct calculation involves understanding that the inventory turnover ratio in the context given seems to be misinterpreted. For a service company, the direct comparison should involve costs related to services provided, but since inventory is mentioned, we'll proceed with a standard approach for inventory turnover which typically involves COGS. Given the lack of direct COGS, we might consider the change in inventory as part of the operational flow, but this leads to confusion without standard COGS. The provided information does not directly lead to a conventional calculation of the inventory turnover ratio as understood in retail or manufacturing contexts, leading to a misunderstanding in the initial explanation. The correct approach to find the inventory turnover ratio involves understanding it as the cost of goods sold (or services provided in this context) over the average inventory. However, without clear COGS, the calculation provided was incorrect, leading to a reevaluation of how to approach this with the given data. The mistake was in the interpretation of how inventory affects a service-based company and the calculation of the turnover ratio without clear COGS, which is not directly provided or accurately represented by the cost of services.

A Small Company That Trains Executives on How to Act