If a firm's inventory ratio increases, what will happen to the firm's operating cycle?
A)It will increase.
B)It will decrease.
C)It will increase and then slowly decrease back to the initial level.
D)It will decrease and the slowly increase back to the initial level.

Question

Quizplus · Accepted Answer

The inventory ratio is calculated by dividing the cost of goods sold by average inventory. An increase in this ratio means that the firm is holding more inventory relative to sales. This implies that the firm will take longer to sell its inventory, and therefore, its operating cycle will increase. The operating cycle is the time taken by the firm to convert its inventory into cash, which includes the time taken to sell inventory and collect receivables from customers.

If a Firm's Inventory Ratio Increases, What Will Happen to the Firm's