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Why can no single inventory turnover value be called good for every firm?
ABecause inventory is valued at its selling price
BBecause the acceptable rate depends on the line of business
CBecause turnover is measured only once every five years
DBecause turnover ignores the cost of goods sold entirely
Answer & Solution
Correct answer: B. Because the acceptable rate depends on the line of business
1. The acceptable turnover ratio depends on the line of business.
2. A grocery store, selling perishable goods quickly, might turn its stock 20 times a year.
3. A heavy equipment manufacturer might turn its stock only three times a year and still be healthy.
4. Judging the manufacturer against the grocer's 20 would condemn a perfectly normal business, which is why comparison must be industry by industry.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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