The higher the inventory turnover ratio, the more inefficient the firm is in managing its inventory.

True or False?

False. The statement is incorrect.

The inventory turnover ratio measures how efficiently a firm manages its inventory by analyzing how many times it sells and replaces its inventory within a specific period. It is calculated by dividing the cost of goods sold by the average inventory.

A higher inventory turnover ratio generally implies that a firm is effectively managing its inventory, as it indicates that the company is selling and restocking its inventory more frequently. This can lead to reduced carrying costs, reduced risk of obsolete inventory, and increased cash flow. Therefore, a higher inventory turnover ratio is generally viewed as a positive indicator of efficiency in inventory management.

Conversely, a lower inventory turnover ratio indicates that a firm may be struggling to sell and replenish its inventory. This can be a sign of poor sales or excessive inventory levels. Lower turnover ratios may result in increased carrying costs, a higher risk of inventory obsolescence, and potential cash flow issues.

So, to summarize, the higher the inventory turnover ratio, the more efficient the firm is in managing its inventory.