Days' sales in inventory:
A) Is calculated by dividing cost of goods sold by ending inventory.
B) Is a substitute for the acid-test ratio.
C) Focuses on average inventory rather than ending inventory.
D) Is also called days' stock on hand.
E) Is used to measure solvency.

Question

Quizplus · Accepted Answer

Days' sales in inventory is also called days' stock on hand, and it measures the number of days a company's inventory will last based on the current rate of sales. It is calculated by dividing the ending inventory by the average daily cost of goods sold. It is not a substitute for the acid-test ratio, which measures a company's ability to pay its current liabilities with its current assets excluding inventory. It also does not focus on average inventory, but rather uses ending inventory in its calculation. Finally, it is not used to measure solvency, but rather a company's efficiency in managing its inventory.

Days' Sales in Inventory