Inventory turnover measures __________.

• A. the ratio of net income to average inventory
• B. the average number of days it takes to collect receivables
• C. the percentage of sales made on credit
• D. how many times a company's inventory is sold and replaced during a period

Answer: (D)

Verified step by step guidance

1. Understand the concept of inventory turnover: Inventory turnover is a financial ratio that measures how efficiently a company manages its inventory by calculating how many times the inventory is sold and replaced during a specific period.
2. Recognize the formula for inventory turnover: The formula is \( \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). This ratio helps assess the efficiency of inventory management.
3. Clarify the purpose of inventory turnover: A higher inventory turnover indicates that a company is selling and replenishing its inventory more frequently, which can be a sign of strong sales or efficient inventory management. Conversely, a lower turnover may suggest overstocking or weak sales.
4. Differentiate inventory turnover from other metrics: Inventory turnover specifically measures the frequency of inventory sales and replacement, unlike metrics such as the average collection period (related to receivables) or the percentage of credit sales (related to sales transactions).
5. Relate the concept to the correct answer: Based on the explanation, inventory turnover measures how many times a company's inventory is sold and replaced during a period, aligning with the correct answer provided in the problem.