CFA Practice Question

There are 120 practice questions for this study session.

CFA Practice Question

A decrease in the inventory turnover may mean ______

I. more inventory is on hand and is not moving through manufacturing and being sold.
II. a change in the company's product mix.
III. the company is reducing its risk of inventory stock-outs.
A. I only
B. I and III
C. I, II and III

User Contributed Comments 9

User Comment
ManuB How does it imply change in product mix?
mtwash ManuB: check the textbook, P117.
FIGER mtwash: Manu would like to know how ? what you have said is right as per books...

Manu: Your question is fundu. The change in the product mix can have a positive/negative impact on the inventory (but the negative only in the short run). For eg. a company switches over to costly products consuming the more materials from the inventory (now you will argue that the inventory is going down and hence the INCREASE in turnover retio)- this is a short time effect. Mind you company has to replicate the inventory level to catch up with the production and hence new material will come in. Now the inventory will GO UP because the other itmes (not used for costly products) are sitting ideal and the total effect is higher inventory lever.
Hope I have cleared this...
reganbaha A change in the product mix, would infer that you have both old inventory that you are moving away from and new inventory that you are moving towards. Thus you have more inventory on board overall, which would decrease ITOR. Simples.
gaetmichel Thx FIGER. But the question does not state "in the long run". Therefore it remains that a change in product mix can have a negative impact.
the answer should say :
"change in product mix MAY decrease inventory turnover",
that's more correct than "decrease in inventory MAY MEAN a change in product mean"
gaetmichel ...product mix", you got it
ksnider what is a stock-out??
ksnider stock-out = an event that causes inventory to be exhausted. so inventory would decrease as more inventory is held to prevent these.
ascruggs92 gaetmichel: give me a break, would the answer really be so much more clear to you had they simply changed the order of the sentence?

Just think about it logically, lower inventory turnover means more inventory on hand. Is it possible for that to be a result of a company changing its product mix? Yes, one example being that a company adds a new product, which adds additional inventory. Long run vs short run doesn't matter
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