Some Analysts Calculate the Inventory Turnover Ratio by Dividing Sales

question 95

Multiple Choice

Some analysts calculate the inventory turnover ratio by dividing sales, rather than cost of goods sold, by the average inventory. Which of the following regarding the inventory turnover ratio is/are not true?

• A)Using sales in the numerator, will lead to incorrect measures of the inventory turnover ratio for calculating the average number of days that inventory is on hand until sale.
• B)As long as the ratio of selling price to cost of goods sold remains relatively constant, either measure will identify changes in the trend of the inventory turnover ratio.
• C)Using sales in the numerator, will lead to correct measures of the inventory turnover ratio for calculating the average number of days that inventory is on hand until sale.
• D)Choices a and b.
• E)None of the above.

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Definitions:

High Reliability

The concept or state of being able to function under high levels of uncertainty or risk without significant failures or accidents.

Content Validity

The extent to which a test measures the entire range of material or behavior that is supposed to be measured.

Low Validity

A term indicating that the effectiveness or correctness of a measurement or test is questionable or lacking.

Binet-Simon Scale

The first intelligence test, developed by Alfred Binet and Théodore Simon, designed to identify children with learning impairments.