Question

which of the following would explain a company’s inventory turnover ratio rising from 2.5 to 3.5?

the companys total sales has decreased while the average inventory has increased.

the companys total sales has decreased while the average inventory has remained constant.

the companys cost of goods sold has decreased while the average inventory has remained constant.

the companys cost of goods sold has remained constant while the average inventory has decreased.

Explanation:

Step1: Recall Inventory Turnover Formula

The formula for inventory turnover ratio is $Inventory\ Turnover\ Ratio=\frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}$ (or sometimes $\frac{Net\ Sales}{Average\ Inventory}$, but COGS is more accurate for inventory turnover). A rising ratio means either the numerator (COGS or Sales) increases, the denominator (Average Inventory) decreases, or a combination (numerator up and denominator down, numerator up more than denominator up, denominator down more than numerator down).

Step2: Analyze Each Option

• Option 1: Sales (numerator) decreased, Inventory (denominator) increased. This would decrease the ratio (smaller numerator, larger denominator) → Eliminate.
• Option 2: Sales (numerator) decreased, Inventory (denominator) constant. This would decrease the ratio (smaller numerator, same denominator) → Eliminate.
• Option 3: COGS (numerator) decreased, Inventory (denominator) constant. This would decrease the ratio (smaller numerator, same denominator) → Eliminate.
• Option 4 (the last one, partially visible): COGS (numerator) constant, Inventory (denominator) decreased. If numerator is constant and denominator decreases, the ratio $\frac{COGS}{Average\ Inventory}$ will increase (e.g., $\frac{100}{100}=1$, $\frac{100}{50}=2$). This matches the ratio rising from 2.5 to 3.5.

Answer:

The option where "The company's cost of goods sold has remained constant while the average inventory has decreased." (the last option, assuming it's the fourth one with that description).