Question

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?

Decrease in the inventory turnover rate
Decrease in the net working capital turnover rate
Increase in the fixed asset turnover rate
Decrease in the days sales inventory
Decrease in the total asset turnover rate

Answer 1

Answer:

The answer is: Decrease in the days sales inventory

Explanation:

Days Sales in Inventory (DSI), represents on average how many days does a business need to convert its inventory into sales.

Its formula is:

                               Inventory

DSI  =              _________________         x       number of days in the period

                               Cost of sales  

For example at the end of year 1, Corner Hardware had $10,000 in inventory. Its total COGS for year 1 were $500,000. We can calculate the DSI  ($10,000 / $500,000) x 365 days = 7.3 days

This means that it took Corner Hardware a little over a week (7.3 days) to sell its inventory.

Now during year 2, Corner Hardware was able to increase its sales by 20% while maintaining the same inventory levels as before. We can calculate de DSI for year 2 ($10,000 / $600,000) x 365 days = 6.08 days.

This means that it took Corner Hardware approximately 6 days (6.08) to sell its inventory.

So if the total sales of a company increases and their inventory remains the same, then their DSI will decrease.