From last year to this year, Colossal Companys current ratio increased and its inventory turnover decreased. Does
Question:
From last year to this year, Colossal Company’s current ratio increased and its inventory turnover decreased. Does this imply a higher, or lower, risk of obsolete inventory?
Step by Step Answer:
The decrease in inventory turnover an...View the full answer
Fundamentals of Financial Accounting
ISBN: 978-1259864230
6th edition
Authors: Fred Phillips, Robert Libby, Patricia Libby
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Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.
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