CFA Level I · CFA Level I Exam · Financial Analysis Techniques
An analyst observes that a company's inventory turnover has declined while its gross margin has remained stable and sales have grown slowly. The change is most likely a sign of:
A falling inventory turnover most likely means inventory is being held longer relative to cost of sales, so it is moving more slowly. Lower turnover lengthens days of inventory on hand, which signals weaker inventory management rather than improved efficiency.
- Amore efficient inventory management
- Bslower-moving inventory relative to cost of salesCorrect
- Ca shorter number of days of inventory on hand
Explanation
Inventory turnover is cost of sales divided by average inventory. A decline means inventory is growing faster than cost of sales, so it is moving more slowly. Option C is the opposite, since lower turnover lengthens days of inventory on hand.
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