Question

Inventory turnover ratio $=$ Cost of __________ during the period $÷$ Cost of average inventory held during the period.

• A. Inventory consumed
• B. Minimum inventory
• C. Maximum inventory
• D. None of these

Answer 1

The correct option is A Inventory consumed

Inventory turnover ratio determines the number of times stock is turned into sales during the accounting period under consideration. It expresses the relationship between the cost of goods sold and stock of goods. The formula for its calculation is as follows:

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where average stock refers to arithmetic average of opening and closing stock, and the cost of goods sold means sales less gross profit

It studies the frequency of conversion of stock of finished goods into sales. It is also a measure of liquidity. It determines how many times stock is purchased and replaced during a year. Low turnover of stock may be due to bad buying, obsolete stock, etc. and is a danger signal. High turnover is goods but is must be carefully interpreted as it may be due to buying into small lots or selling quickly at low margin to realize cash. Thus, it throws light on utilization of stock of goods.