1. Which one of the following statements is correct (true) with respect to the f
ID: 2434873 • Letter: 1
Question
1. Which one of the following statements is correct (true) with respect to the following two ratios: Inventory turnover ratio = COGS/Ave. Inventory Days to sell = 365/Inventory turnover ratioA. The larger the "days to sell ratio" the better.
B. Reducing inventory on hand by establishing better inventory management policies would reduce the "inventory turnover ratio".
C. Using just the end of the period inventory to calculate the "inventory turnover ratio" is just as appropriate as using "average inventory".
D. Inventory obsolescence [slow moving inventory] will cause the "days to sell" ratio to increase.
2. Which one of the following is incorrect (false) with respect to GAAP/accounting rules as applies to inventory?
A. a company is allowed to change from LIFO to FIFO and back from year to year if the company's cost of inventory is fluctuating (as this would allow a constant gross profit percentage to exist and thus allow better comparability for time series analysis)
B. inventory is reported at "historical cost" unless the "replacement cost" (market value) of the inventory has dropped below historical cost, in which case LCM applies
C. four acceptable "cost flow methods" are allowed to be used, which are LIFO, FIFO, weighted average and specific identification
D. the LIFO conformity rule states that if a company uses the LIFO cost flow method for tax it must also use it for books (financial reporting)
Explanation / Answer
Since a decrease in inventory would cause the denominator to decrease, the turns would increase, resulting in a lower days to sell figure, which is desirable. Just in time management is an example of this, in practice. U.S. GAAP does not allow for a company to flip back and forth on how it measures the cost of goods sold and; no more or less, it doesn't allow leeway in switching, for blatant manipulation.
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