Question

which of the following will decrease the days of inventory?
decreasing the return on equity ratio
decreasing costs of goods sold
decreasing average inventory

Explanation:

The formula for days of inventory is $\frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \times 365$ (or relevant period). To decrease days of inventory, we analyze each option:

• Return on equity (ROE) is $\frac{\text{Net Income}}{\text{Shareholders' Equity}}$, unrelated to inventory days, so "decreasing ROE" is irrelevant.
• Decreasing cost of goods sold (COGS) would increase the ratio $\frac{\text{Average Inventory}}{\text{COGS}}$, thus increasing inventory days (since COGS is in the denominator).
• Decreasing average inventory (numerator in the inventory days formula) while COGS (denominator) stays stable (or changes less) will reduce the overall ratio, decreasing inventory days.

Answer:

decreasing average inventory