F5 & F6 - Efficiency & Limitations of Ratios

Question 1

What does an inventory turnover measure?

Answer 1

The average amount of time an item is held by the business before it is sold (shelf life).

Question 2

Evaluate using ratios to assess business performance.

Answer 2

+ Help compare current performance with previous records & firm’s performance with similar competitors.

- The data is historic, as it’s using past data which may not reflect current performance, financial records are easy to manipulate which can lead to false ratios & doesn’t take into account external factors (e.g. worldwide recession).