Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. If a firm increases its sales and cost of goods sold while holding its inventories constant, then the cost of goods sold would increase relative to the average inventory, resulting in a higher inventory turnover ratio. Therefore, option D is correct. Option A is incorrect because an increase in cost of goods sold would increase the inventory turnover ratio, not decrease it. Option B and C are incorrect because changes in inventory directly affect the current ratio, which is calculated by dividing current assets by current liabilities. Option E is incorrect because a reduction in the inventory turnover ratio generally indicates poor performance and a lower return on equity (ROE).

Which of the Following Statements Is CORRECT