Among the activity ratios the executives want to see calculated is the

QUESTION

Among the activity ratios the executives want to see calculated is the inventory turnover ratio. Which of the following questions does this ratio best help answer?

A) How many employees does Santos need to turn over its inventory?
B) How much debt does Santos currently carry?
C) What is Santos’s current owners’ equity?
D) How quickly is Santos selling its products?
E) What is Santos’s return on sales?

ANSWER

Answer: D
Explanation: D) The inventory turnover ratio is a way to tell how much the company is selling compared to its inventory on hand. If the ratio is high, then the company is not holding too much inventory compared to its rate of income and, therefore, it is selling at a good rate. The number of employees (Choice A), the company’s debt (Choice B), and owners’ equity (Choice C) are not factors in the inventory turnover ratio. Return on sales (Choice E) is net income divided by sales, a profitability ratio that might be good or poor regardless of the inventory turnover ratio.