Which of the following statements correctly explains what the inventory turnover ratio assesses?

• A. It measures how many times a company's inventory is sold and replaced over a period.
• B. It shows the percentage of net income generated from total assets.
• C. It indicates the proportion of inventory financed by long-term debt.
• D. It assesses the average number of days it takes to collect receivables.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of the inventory turnover ratio. It is a financial metric used to evaluate how efficiently a company manages its inventory by measuring how many times inventory is sold and replaced during a specific period.
2. Step 2: Compare the given options to the definition of the inventory turnover ratio. The correct explanation should align with the idea of measuring the frequency of inventory sales and replacement.
3. Step 3: Eliminate options that do not relate to inventory management. For example, options discussing net income from total assets, inventory financed by long-term debt, or receivables collection are unrelated to the inventory turnover ratio.
4. Step 4: Identify the option that directly corresponds to the inventory turnover ratio's purpose, which is to measure how many times a company's inventory is sold and replaced over a period.
5. Step 5: Confirm the correct answer by ensuring it matches the definition and purpose of the inventory turnover ratio, which is focused on inventory sales and replacement frequency.