In financial statement analysis, what does the inventory turnover ratio primarily measure?

• A. The percentage of total assets financed by inventory
• B. How many times, on average, a company sells and replaces its inventory during a period
• C. The company’s ability to pay short-term obligations as they come due
• D. The average number of days it takes the company to collect cash from customers

Answer: (B)

Verified step by step guidance

1. Understand that the inventory turnover ratio is a measure used in financial statement analysis to evaluate how efficiently a company manages its inventory.
2. Recognize that the ratio calculates how many times a company sells and replaces its inventory over a specific period, typically a year.
3. Recall the formula for inventory turnover ratio: \(\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\).
4. Interpret the ratio as an indicator of inventory management efficiency—higher turnover means inventory is sold and replenished more frequently, which can imply good sales or effective inventory control.
5. Distinguish this ratio from other financial metrics such as liquidity ratios (which measure ability to pay short-term obligations) or receivables turnover (which measures collection of cash from customers).