Certified Internal Auditor (CIA) Practice Test

What analytical result suggests obsolete merchandise?

1. Decrease in inventory turnover rate

2. Decrease in the gross profit to sales ratio

3. Decrease in the ratio of inventory to accounts payable

4. Decrease in the ratio of inventory to accounts receivable

The correct answer is: Decrease in inventory turnover rate

A decrease in the inventory turnover rate is a strong indicator of obsolete merchandise. Inventory turnover rate measures how frequently a company's inventory is sold and replaced within a certain period. A declining rate suggests that goods may be sitting unsold for extended periods, which can lead to increased instances of obsolescence, particularly in industries where products have a limited shelf life or trend-based nature. When merchandise becomes obsolete, it typically means that it is no longer marketable due to age, changes in consumer preferences, or advancements in technology. This stagnation in inventory leads to a reduced turnover rate, as the outdated products do not sell at the pace expected. Therefore, a decrease in inventory turnover directly implies that the company may be holding onto items that are not generating sales, which aligns closely with the concept of obsolescence in inventory management.