An organization has a declining inventory turnover but an increasing gross margin rate. Which of the following statements can best explain this situation?
A.
The organization's operating expenses are increasing
B.
The organization has adopted just-in-time inventory
C.
The organization is experiencing inventory theft
When inventory is overstated, it means that the organization is reporting higher inventory levels than actually exist. This can result in lower cost of goods sold (COGS), which in turn leads to a higher gross margin rate.
Inventory turnover = COGS/Average Inventory. Turnover declines when the denominator or ave inventory increases. From the choices, only D will cause the turnover to decline.
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