Which statement about inventory turnover ratio is true?

• A. A higher turnover indicates slower movement of inventory.
• B. A higher turnover indicates more efficient management and faster sales relative to inventory.
• C. Turnover is calculated as Average Inventory divided by COGS.
• D. Turnover measures days sales outstanding.

Answer: (B)

The main idea here is how often a company sells and replaces its inventory over a period. Inventory turnover shows how quickly inventory is turned into sales, so a higher turnover means inventory is selling faster relative to how much inventory you keep on hand.

Why this statement is best: when turnover is higher, you’re converting inventory to sales more rapidly, which typically signals efficient inventory management and strong demand in relation to the stock you hold. This helps reduce carrying costs and the risk of obsolescence.

For context, turnover is usually calculated as Cost of Goods Sold divided by Average Inventory (typically average of beginning and ending inventory for the period). A higher result means faster movement of goods. Be aware that extremely high turnover can also indicate stockouts, while low turnover suggests overstock or weak sales.

The other ideas mix up the concept: suggesting higher turnover means slower movement is opposite of what turnover measures; using the inverse of the correct formula is incorrect; and describing days sales outstanding points to receivables collection, not inventory turnover.