Question

Stock turnover ratio comes under

• A. Liquidity ratio
• B. Profitability ratio
• C. Activity ratio
• D. Financial position ratio

Hint:

Remember that any ratio with "Turnover" in its name (e.g., Stock Turnover, Debtors Turnover, Asset Turnover) is an Activity Ratio. They measure how actively or efficiently assets are being 'turned over' into sales.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks for the classification of the Stock Turnover Ratio (also known as Inventory Turnover Ratio).
Step 2: Key Concept:
Financial ratios are categorized based on what aspect of the business performance they measure. The main categories are:
- Liquidity Ratios: Measure the firm's ability to meet its short-term obligations (e.g., Current Ratio, Quick Ratio).
- Profitability Ratios: Measure the firm's ability to generate profits from its sales and assets (e.g., Gross Profit Ratio, Net Profit Ratio).
- Activity Ratios (or Turnover/Efficiency Ratios): Measure how efficiently the firm is using its assets to generate sales.
- Solvency Ratios (Financial Position Ratios): Measure the firm's ability to meet its long-term obligations (e.g., Debt-Equity Ratio).
Step 3: Detailed Explanation:
The Stock Turnover Ratio is calculated as:
\[ \text{Stock Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Stock}} \]
This ratio indicates how many times a company's inventory is sold and replaced over a period. It measures the efficiency with which a company is managing its inventory (an asset). Since it measures the efficiency or the 'activity' of the inventory, it falls under the category of Activity Ratios.
Step 4: Final Answer
The Stock Turnover Ratio is an activity ratio that measures the efficiency of inventory management.