Which ratio measures the number of dollars of sales produced per dollar of inventory?

• A. Inventory Turnover Ratio
• B. Debt-to-Equity Ratio
• C. Current Ratio
• D. Gross Profit Margin

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of the Inventory Turnover Ratio. It measures how efficiently a company uses its inventory to generate sales. The formula is: $\frac{\mathrm{Cost of Goods Sold}}{\mathrm{Average Inventory}}$.
2. Step 2: Compare the Inventory Turnover Ratio to the other options provided. The Debt-to-Equity Ratio measures financial leverage, the Current Ratio measures liquidity, and the Gross Profit Margin measures profitability. None of these directly relate to sales per dollar of inventory.
3. Step 3: Recognize that the Inventory Turnover Ratio specifically addresses the relationship between sales and inventory, making it the correct choice for this question.
4. Step 4: Note that the Inventory Turnover Ratio helps businesses understand how quickly inventory is sold and replaced, which is crucial for managing stock levels and operational efficiency.
5. Step 5: Conclude that the Inventory Turnover Ratio is the correct answer because it directly measures the number of dollars of sales produced per dollar of inventory.