Audit and Assurance Practice Exam

How does a new product introduction typically affect days' sales in inventory in terms of expectations?

1. Days' sales in inventory is expected to stay the same

2. Days' sales in inventory is likely to increase

3. Days' sales in inventory is expected to decrease

4. Days' sales in inventory may fluctuate without warning

The correct answer is: Days' sales in inventory is expected to decrease

When a new product is introduced, it often leads to an increase in sales excitement and consumer interest, which can contribute to a quicker turnover of inventory. This frequently results in a decrease in the days' sales in inventory metric, as the business aims to adjust its inventory levels more efficiently in response to market demand and consumer preferences. A product launch typically means that a company will not only aim to optimize its inventory practices to accommodate the new product but will also likely experience an initial boost in sales. As the product gains traction in the market, inventory is sold faster, leading to a reduction in the amount of time that inventory sits before it is sold. Therefore, the expectation is that days' sales in inventory will decrease as inventory is sold more rapidly to meet new demand. Days' sales in inventory measurements focus on how long it typically takes to sell the entire inventory, and with an effective marketing strategy and consumer interest in a new product, businesses often find that they achieve shorter inventory cycles, reflecting a decrease in this metric. Hence, the expectation is a decrease in the days' sales in inventory with the introduction of a new product.