Certified Valuation Analyst (CVA) Practice Exam

What is the inventory turnover ratio according to the financial statements?

1. 1.0

2. 1.9

3. 2.5

4. 3.2

The correct answer is: 1.9

The inventory turnover ratio is a financial metric used to assess how efficiently a company manages its inventory. It indicates how many times a company has sold and replaced its inventory over a specific period, typically a year. This ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory during the same period. When analyzing the choices, a ratio of 1.9 suggests that the company sold and replaced its inventory almost two times in a year. This level of turnover can be considered efficient for many businesses, demonstrating a healthy demand for the company's products and effective inventory management practices. A higher inventory turnover is generally favorable as it implies that a company is moving its inventory quickly and minimizing excessive holding costs. In contrast, lower ratios indicate that inventory is not being sold as rapidly, which could lead to increased carrying costs and potential obsolescence. Therefore, the figure of 1.9, representing a solid performance in inventory management, confirms its validity as the correct answer in this context.