To determine inventory turnover from financial data, which quantity should be used for the flow rate in the calculation?

• A. Gross Profit
• B. Net Sales
• C. Total Assets
• D. Operating Expenses

Answer: (B)

Verified step by step guidance

1. Understand the concept of inventory turnover: Inventory turnover measures how efficiently a company sells and replaces its inventory over a specific period. It is calculated using the formula: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory.
2. Identify the flow rate in the calculation: The flow rate represents the activity or sales that drive inventory turnover. In this case, the correct quantity to use is Net Sales, as it reflects the revenue generated from selling goods and services.
3. Eliminate incorrect options: Gross Profit, Total Assets, and Operating Expenses are not directly related to the calculation of inventory turnover. Gross Profit measures profitability, Total Assets represent the company's resources, and Operating Expenses are costs incurred during operations.
4. Clarify why Net Sales is appropriate: Net Sales is directly tied to the movement of inventory because it represents the revenue generated from selling goods. It is a key driver of inventory turnover and provides a clear measure of sales activity.
5. Apply the concept: To calculate inventory turnover, ensure you use Net Sales in the numerator of the formula along with Average Inventory in the denominator. This will provide insight into how efficiently inventory is managed.