An auditor is performing a ratio analysis. The 'Inventory Turnover' ratio has decreased significantly from the prior year. This most likely indicates:

Answer options:

Inventory is being sold faster than before.

The existence of obsolete or slow-moving inventory.

The company has switched to Just-In-Time inventory.

Sales have increased proportionally with inventory.

How to approach this question

Formula: COGS / Average Inventory. If Ratio goes down, either COGS went down (less sales) or Inventory went up (stockpiling).

Full Answer

B.The existence of obsolete or slow-moving inventory.✓ Correct

A decrease in inventory turnover means inventory is sitting on the shelves longer. This is a primary indicator of potential obsolescence or slow-moving goods, raising valuation risks.

Common mistakes

Confusing the direction of the ratio (High turnover is usually good/fast).

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