Assume a company buys inventory with cash, just before year end. Assume the inventory has not been sold before the end of the year. Which of the following statements is correct regarding the effect of buying the inventory?
A) Its current ratio will increase.
B) Its inventory turnover ratio will decrease.
C) Capital structure leverage will decrease.
D) Its return on assets will decrease.

Question

Quizplus · Accepted Answer

Buying inventory just before year-end, without selling it, increases the inventory on hand, which lowers the inventory turnover ratio. This ratio measures how many times a company sells and replaces its inventory over a period. An increase in inventory without a corresponding increase in sales reduces this ratio.

Assume a Company Buys Inventory with Cash, Just Before Year