Question

43) You are analyzing five companies that have the Inventory Turnover rates that follow. If all...

43) You are analyzing five companies that have the Inventory Turnover rates that follow. If all of the companies otherwise have identical figures for all other working capital accounts, which of the five companies most efficiently manages its working capital?

Company A: 21 days

Company B: 31 days

Company C: 40 days

Company D: 56 days

Company E: 72 days

A) Company D

B) Company A

C) Company B

D) Company E

E) Company C

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Answer #1

A lower inventory turnover rate means higher turnover ratio and vice versa. Hence the lower the turnover rate, the more number of times inventory is turned over.

For example, in the given case,

Turnover rate of 21 days of A indicates turnover ratio of 1/(21/365) = 17.38

Turnover rate of 72 days of E indicates turnover ratio of 1/(72/365) = 5.07

Since the lowest inventory turnover rate (and resultantly the highest number of times inventory is turned over) marks the highest efficiency, Company A most efficiently manages its working capital.

The answer is option B

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