Chapter 10: Accounts Receivable and Inventory Management MCQs

Multiple-Choice Quiz

Chapter 10:   Accounts Receivable and Inventory Management

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1. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory. In fact,

$160,000 is released.

$100,000 is additionally invested.

$60,000 is additionally invested.

$60,000 is released.      Correct!

 IT = 5 = $800,000/ INVENTORY (old)

 Therefore, INVENTORY (old) = $800,000/5 = $160,000

 IT = 8 = $800,000/ INVENTORY (new) 

 Therefore, INVENTORY (new) = $800,000/8 = $100,000 

 $160,000 - $100,000 = $60,000 released (i.e., Source of Funds)