What does the inventory turnover ratio indicate?

• A. How quickly inventory is used or sold; efficiency
• B. Total revenue divided by average inventory
• C. Profit margin per item
• D. COGS divided by average inventory

Answer: (D)

Inventory turnover ratio shows how quickly inventory is used or sold over a period, reflecting how efficiently you manage stock and your cash flow. The best answer uses COGS divided by average inventory, because COGS represents the cost of items actually sold and average inventory smooths seasonal changes (beginning plus ending inventory divided by two). The resulting figure tells you how many times you fully turn over your inventory in that period. A higher turnover means faster movement and typically better liquidity and lower carrying costs, while a lower turnover suggests overstocking or slow-moving items. For example, if COGS is 60,000 and average inventory is 12,000, the turnover is 5, meaning inventory turned over five times that period. Other options don’t measure turnover correctly: using total revenue instead of COGS doesn’t capture the cost side of sales, and focusing on profit margin per item addresses profitability, not how quickly inventory moves.