Inventory turnover measures how frequently a company sells and replaces its average inventory during a reporting period. It is calculated as:
Inventory turnover = Cost of goods sold ÷ Average inventory
Using the figures provided:
$2,400,000 ÷ $400,000 = 6.0 times
Option C is correct.
The result indicates that the company sold and replenished the equivalent of its average inventory approximately six times during the year. A higher turnover can indicate efficient inventory management, strong sales or limited inventory holdings. However, an unusually high ratio may also indicate insufficient stock levels, production constraints or lost sales because the company cannot meet demand.
A low ratio can suggest weak demand, overstocking, obsolete inventory or inefficient working-capital management. Interpretation must therefore consider industry norms, seasonal patterns and changes in the company’s product mix. A grocery retailer would normally have a substantially higher inventory turnover than a heavy-equipment manufacturer.
Cost of goods sold is used instead of revenue because both the numerator and inventory are measured at cost. Using sales revenue would mix values measured on different bases and distort the ratio.
The Retail Securities syllabus identifies inventory turnover as a core efficiency ratio and requires candidates to calculate and interpret liquidity, risk, profitability, efficiency and equity ratios.
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