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inventory turnover

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You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than prior years. Provide three explanations that would be consistent with this observation. Explain whether these would be of concern to you and what the effect might be on next period's financial results.

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Solution Summary

Your response is 194 words and explains what turnover means, shows you what would make inventory turnover go down and then gives you three stories that would lead to lower turnover. Two are not problematic but the third one is a cause for concern. Reasons are given.

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Lower turnover means that inventory is taking longer to move (sell).

Turnover of 1 = 365 days
Turnover of 2 = every six months
Turnover of 12 = once a month
Turnover of 24 = about every two weeks
So, the lower the turnover, the more days in inventory (days to sell)

What would make the rate lower:

Lower cost of goods sold ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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