Audit and Assurance Practice Exam

If days' sales in inventory increase due to a new product, what does this imply about inventory management?

1. Inventory is being sold slowly

2. Inventory is being cycled effectively

3. Inventory turnover is declining

4. Inventory is at risk of obsolescence

The correct answer is: Inventory is being sold slowly

When days' sales in inventory increases, it indicates that the company is taking longer to sell its inventory relative to its sales. This in turn signals that inventory is being sold slowly. An increase in this metric suggests that new products may not be moving off the shelves as quickly as expected, which can arise from factors such as lower demand, pricing issues, or ineffective marketing strategies. Additionally, the relationship between days' sales in inventory and inventory management implies that a company may need to reassess its sales strategies, promotional efforts, or inventory purchasing practices. This lack of turnover can lead to potential capital being tied up in unsold inventory, which can adversely affect cash flow. While the other options also provide insights into inventory management, they do not directly address the primary implication of an increase in days' sales in inventory. For instance, effective cycling of inventory would generally lead to a decrease in the days' sales number, and declining turnover can be inferred but is not as directly indicated as the slowing of sales themselves. Similarly, while the risk of obsolescence is a concern with increased inventory levels, it is not inherently implied by the increase in days' sales in inventory. Thus, the most straightforward implication is that inventory is being sold slowly.