To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

Question

Quizplus · Accepted Answer

Choice "B" is correct. The appropriate numerator for calculating inventory turnover is cost of goods sold. Cost of goods sold is the expense most clearly associated with the sale (turnover) of inventory, which is priced at acquisition cost, not selling price. Choice "A" is incorrect. Net sales is a measure of revenue that reflects the price at which inventory was sold, not its recorded inventoriable value. Choice "C" is incorrect. Operating income does not tie specifically to the recorded value of inventory sold because it reflects the sales price after all operating expenses. Choice "D" is incorrect. Gross sales is a measure of revenue that reflects the price at which inventory was sold, not its recorded inventoriable value.

To Measure How Effectively an Entity Employs Its Resources, an Auditor