Question : Which among the following is the correct way to express the change of inventories of a firm during a year?
Option 1: Change of inventories of a firm during a year (value added - intermediate goods used by the firm + sale of the firm during a year)
Option 2: Change of inventories of a firm during a year (value added + intermediate goods used by the firm + sale of the firm during a year)
Option 3: Change of inventories of a firm during a year (value added - intermediate goods used by the firm - sale of the firm during a year)
Option 4: Change of inventories of a firm during a year (value added + intermediate goods used by the firm - sale of the firm during a year)
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Correct Answer: Change of inventories of a firm during a year (value added + intermediate goods used by the firm - sale of the firm during a year)
Solution : The correct answer is Change of inventories of a firm during a year (value added + intermediate goods used by the firm - sale of the firm during a year).
Inventory turnover, or the change in inventory formula, is the appropriate way to represent a company's change in inventory over a year. By deducting the ending inventory value from the beginning inventory value, one can compute the change in inventories.
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