In financial accounting, what does the inventory turnover ratio measure?

• A. The amount of cash generated from operations relative to inventory on hand
• B. How many times, on average, a company sells and replaces its inventory during a period
• C. The average number of days it takes customers to pay their accounts receivable
• D. The percentage of total assets financed by inventory

Answer: (B)

Verified step by step guidance

1. Understand that the inventory turnover ratio is a measure used in financial accounting to assess how efficiently a company manages its inventory.
2. Recognize that this ratio indicates the number of times a company sells and replaces its inventory within a specific period, usually a year.
3. Know the formula for inventory turnover ratio: \(\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}\).
4. Interpret the ratio: a higher inventory turnover means the company is selling inventory quickly, while a lower ratio may indicate overstocking or slow sales.
5. Distinguish this ratio from other financial metrics such as cash generated from operations, accounts receivable turnover, or asset financing percentages, which measure different aspects of financial performance.