An Analyst Using the Inventory Turnover Ratio to Calculate Future

question 31

Multiple Choice

An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that:

• A) the method reduces the potential understatement inherent in average balances.
• B) the method can introduce artificial volatility in ending balances.
• C) the method results in understating inventory each year.
• D) the method results in overstating inventory each year.

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Definitions:

Share Options

Rights granted by a company to its employees or directors to buy shares in the company at a fixed price for a limited period.

Exercise Price

The price at which an option holder can buy (call option) or sell (put option) the underlying asset or security by a predetermined date.

Ordinary Shares

Equity securities representing ownership in a company, giving shareholders voting rights and a share in the company's profits.

IPO

Initial Public Offering, the process through which a private company becomes publicly traded by offering its shares to the public for the first time.