Which of the following is correct? a) A reduction in inventories held would have

Question

Which of the following is correct?

a) A reduction in inventories held would have no effect on the current ratio.
b) An increase in inventories would have no effect on the current ratio.
c) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
d) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE
e) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory ratio will decrease.

Explanation / Answer

c) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. - Correct Suppose you had $3,000 Cost of goods sold and $300 as Average Inventory, the inventory turnover ratio will be 10 Times (3000/300). If the Sales is increased and cost of goods sold reached $3,600, with same average inventory as $300, the new inventory turnover ratio will be 12 times (3,600 /300)

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