The corner hardware has succeeded in increasing the amount of goods it sells whi

Question

The corner hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firms financial ratios in which one of the following ways?

Decrease in the inventory turnover rate

Decrease in the net working capital turnover rate

Increase in the fixed asset turnover rate

Decrease in the days sales inventory

Decrease in the total asset turnover rate

Explanation / Answer

Days sales in inventory = (Inventory/cost of goods sold)*365

If sales are increasing, then cost of goods sold will also increase. Inventory is constant. This will lead to decrease in days sales inventory.

For example, cost of goods sold increased to $10,000 from earlier $8,000 as a result of increase in sales. Inventory is constant at $5,000.

Earlier days sales inventory = (5000/8000)*365 = 228 days

After the increase it is (5000/10000)*365 = 183 days.

Hence there is a decrease in days sales inventory.

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