Question

25. A low inventory turnover ratio
indicates?



1. Investment tied up in stock
2. absolute goods on hand
3. Adverse liquidity
4. All of the above​

Answer 1

Answer:

A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory.

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Answer 2

Answer:

The correct option is (4) All of the above.

Explanation:

Inventory Turnover Ratio-

A financial statistic called inventory turnover ratio shows how frequently a company's inventory is sold and replaced over the course of a specific time period. The inventory turnover formula and the number of days in the period can then be used to calculate how long it will take to sell the current inventory.

The formula is:

Inventory Turnover Ratio – Cost of Goods Sold/ Average Inventory

A Higher Ratio-

A greater ratio is generally preferable because it indicates that your stock is being rapidly depleted by strong sales.

You might want to increase your orders to suppliers before your rivals buy them out because it could also indicate a boom in demand for these products. It might also indicate that you're not purchasing enough inventory or that your supply chain visibility is poor, both of which would restrict the number of sales you can make. If you can grow your supply of in-demand items, that portends opportunity.

A lower Ratio-

Additionally, a company could have a low or negative inventory turnover ratio. This could indicate, among other things, a lack of demand, an outdated product, or a bad sales/inventory policy. Low inventory turnover ratios disadvantage your business and can cause a number of issues. A buildup of inventory results in high maintenance and handling costs. Risk of a product going out of style or becoming obsolete, especially in the consumer products industry. There is a substantial danger of quality degradation during storage because of the waiting period.

Hence, we can conclude that a lower inventory turnover ratio indicates that, the investment is tied up in stock, there is absolute goods in hand and there is adverse liquidity in stock.

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