Question

Sale of inventory on account will cause the inventory turnover ratio to .

• A. increase
• B. decrease
• C. remain unchanged
• D. none of these

Answer 1

Answer: (A)

increase

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Let Cost of goods sold be $Rs.80000$ , Opening inventory = $Rs.20000$ and Closing Inventory = $Rs.30000$

Average Inventory = [Opening Inventory + Closing Inventory] / 2

= $[20000+30000]/2$

$Rs.25000$

Inventory turnover ratio = $80000/25000$

= $3.2$ times

If inventory of $Rs.10000$ is sold on credit then COGS = $Rs.90000$ and the Closing Inventory = $Rs.20000$

Revised Average Inventory = $[20000+20000]/2$

= $Rs.20000$

Revised Inventory turnover ratio = 90000/2000080000/25000

= 4.53.2 times

So sale of Inventory on account will cause the inventory turnover ratio to Increase.