The inventory turnover ratio:
A)Is used to analyze profitability.
B)Is used to measure solvency.
C)Is one measure of a merchandiser's ability to pay its short term obligations.
D)Validates the acid-test ratio.
E)Calculation depends on the company's inventory valuation method.

Question

Quizplus · Accepted Answer

The inventory turnover ratio is a measure of a merchandiser's ability to pay its short term obligations, as it shows how frequently a company sells and replaces its inventory. A high inventory turnover ratio indicates that a company effectively manages its inventory levels and can quickly convert inventory into cash to pay its bills. The calculation does not depend on the company's inventory valuation method. It is not used to analyze profitability or measure solvency, and it does not validate the acid-test ratio.

The Inventory Turnover Ratio