In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Question

Quizplus · Accepted Answer

Choice "D" is correct. Gross profit percentage decreased. In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. Choice "A" is incorrect. If cost of goods sold decreases, the inventory turnover ratio would also decrease. Choice "B" is incorrect. Accounts receivable turnover is calculated as sales divided by receivables. If sales remain the same while this ratio increases, receivables have likely declined. This would have no impact on inventory turnover. Choice "C" is incorrect. Total asset turnover is calculated as sales divided by total assets. If sales remain the same while this ratio increases, total assets have likely declined. This would have no impact on inventory turnover.

In a Comparison of 20X2 to 20X1, Neir Co