Certified Valuation Analyst (CVA) Practice Exam

What does dividing cost of goods sold by inventory help determine?

1. Gross profit margin

2. Inventory turnover

3. Return on assets

4. Operating profit

The correct answer is: Inventory turnover

Dividing the cost of goods sold (COGS) by inventory is a calculation that helps determine inventory turnover. This metric indicates how many times a company sells and replaces its inventory over a specific period, typically a year. A higher inventory turnover ratio implies efficient inventory management and a strong sales performance, as it shows that the company is selling its inventory quickly relative to its stock levels. Understanding inventory turnover is crucial for business analysis as it can indicate the efficiency of sales and inventory management practices. It can also signal to management how well their purchasing and production processes are functioning. The other options relate to different financial metrics. Gross profit margin measures the relationship between gross profit and revenue, which is calculated differently. Return on assets assesses how effectively a company uses its assets to generate profit, and operating profit concerns the overall profitability from operations, neither of which involve the use of COGS in relation to inventory.