What is the relationship between the inventory turnover ratio and the current ratio?Select answer from the options belowthe lower the inventory, the lower the inventory turnover ratio and the current ratiothe higher the inventory, the higher the inventory turnover ratio and the current ratiothe current ratio is a measure of liquidity while the inventory turnover ratio is a measure of solvencythe lower the inventory turnover ratio, the higher the current ratioSave for LaterSubmit Answer
Question
What is the relationship between the inventory turnover ratio and the current ratio?Select answer from the options belowthe lower the inventory, the lower the inventory turnover ratio and the current ratiothe higher the inventory, the higher the inventory turnover ratio and the current ratiothe current ratio is a measure of liquidity while the inventory turnover ratio is a measure of solvencythe lower the inventory turnover ratio, the higher the current ratioSave for LaterSubmit Answer
Solution
The correct answer is: the current ratio is a measure of liquidity while the inventory turnover ratio is a measure of solvency.
Here's why:
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
On the other hand, the inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period such as a year. It is a measure of the efficiency of a company in managing its inventory and generating sales from it.
So, these two ratios measure different aspects of a company's financial health - one is about liquidity (current ratio) and the other is about efficiency and solvency (inventory turnover ratio). They are not directly related in the way the other options suggest.
Similar Questions
The inventory turnover ratio is calculated by dividing:Question 17Answera.Average inventory by total assetsb.Cost of goods sold by total assetsc.Average inventory by cost of goods soldd.Cost of goods sold by average inventory
Which ratio is the cost of goods sold divided by the average inventory?Multiple choice question.The inventory turnover ratioThe debt to owners' equity ratioThe return on sales ratioThe current ratio
The ratios that measure the effectiveness of a firm's management in turning over inventory are called ______.Multiple choice question.liquidity ratiosactivity ratiosleverage ratiosquick ratios
Which of the following statements correctly explains what the inventory turnover ratio assesses.Multiple choice question.The inventory turnover ratio assesses what percentage of a company's assets are tied up in its inventory.The inventory turnover ratio assesses the company's ability to generate a profit from the sales of its inventory.The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.
The ratio that measures the speed with which inventory moves through the firm and gets converted into sales is called the ______.Multiple choice question.inventory turnover ratiocost of goods sold ratioreturn on sales ratiosales turnover ratio
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