Question

A firm have an inventory turnover of 5 times a year on a cost of goods sold of $800 000.if the firm improves the inventory turnover to 8 times a year while the cost of goods sold remains the same, which of the following statement is true?
A)$100,000 is additionally invested in purchasing stock
b)$160,000 is released into working capital
c)$60,000 is additionally invested in purchasing stock
d)$60,000 is released into working capital

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Answer 1

Answer:

d)$60,000 is released into working capital

Explanation:

Inventory turnover gives the number of times that a business buys and sells inventory. A high inventory means that a business moves its stock fast, thereby generating cash.

The formula for inventory turnover ratio

=Cost of goods sold/ average inventory

If a firm has COGS of $800,000 and an inventory turnover of 5, then the average inventory will be

=$800,000 /5

= $160,000

should the firm improve turnover to 8, then the average inventory will be

=$800,000/8

=$100,000

It means the firm will be requiring an average inventory of $100,000 as opposed to $160,000 previously. The difference ($60,000) is to be released to working capital.