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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which of the following ratios is calculated as (Cost of goods sold ÷ Average inventory)?

The inventory turnover ratio is cost of goods sold divided by average inventory. It shows how many times stock is sold and replaced during the period. Other turnover ratios use different numerators and denominators, such as credit sales and receivables for debtors turnover.

  1. AInventory turnover ratioCorrect
  2. BDebtors turnover ratio
  3. CFixed assets turnover ratio
  4. DWorking capital turnover ratio

Explanation

Inventory turnover ratio measures how many times stock is converted into sales during a period and equals cost of goods sold divided by average inventory. Debtors turnover uses credit sales over average receivables, so it is not the right ratio here.

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