When comparing inventory turnover ratios,other things being equal,
A) a lower inventory turnover is preferred in order to keep inventory costs low.
B) a higher inventory turnover is preferred to improve liquidity.
C) higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet.
D) higher inventory turnover results from an increase in the selling price of the product.

Question

Quizplus · Accepted Answer

A higher inventory turnover ratio means that the company is selling goods more quickly and efficiently, which leads to better liquidity. This is preferred as it means that the company is not holding onto excess inventory which can tie up cash and lead to higher storage costs. Option A is incorrect as a lower inventory turnover ratio indicated that the company is holding onto inventory for too long, which is unfavorable. Option C is incorrect as old or obsolete inventory would decrease inventory turnover, not increase it. Option D is incorrect as the selling price of the product does not directly impact inventory turnover.

When Comparing Inventory Turnover Ratios,other Things Being Equal