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    Inventory Turnover Ratio

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    A department store had items in its inventory at the end of the year that had a recorded book value of $10,000 and, because of fashion changes, a market value of only $7,000. The department store failed to write down these inventory items to market value. To keep the obsolete condition of the inventory items away from its auditors, the firm shipped the goods to a remote warehouse. The effect of this error was to

    a. understate the inventory turnover ratio
    b. overstate the cost of goods sold to sales percentage
    c. overstate the total assets turnover ratio
    d. understate net income

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    Solution Preview

    Option A is wrong because decreasing overstating will increase the inventory turnover ratio.

    Option B is wrong because understating ...