Quick Ratio and Inventory Turnover

[michaelgrogan]

A company uses cash to purchase inventory. We know that the quick ratio will decrease because there is less cash in the numerator of the equation. However, the inventory turnover will also decrease. Why is this? Does using cash to purchase inventory somehow reduce the cost of goods sold or increase the average inventory?

 

[S2000magician]

Buying inventory increases average inventory. For inventory turnover, the fact that they’re using cash is a red herring; the key is that they’re buying inventory. CFA Institute likes tossing in red herrings to see who’s really paying attention.