CLFP Financial And Tax Accounting For Leases Practice Exam

What does the Sales to Working Capital ratio measure?

Net Income / Net Sales Net Sales / Working Capital Cost of Goods Sold / Average Inventory Net Sales / Current Assets

Correct Answer:

Net Sales / Working Capital

Explanation:

Sales to Working Capital shows how efficiently a company uses its working capital to generate sales. It is calculated as Net Sales divided by Working Capital (where Working Capital = current assets minus current liabilities). A higher ratio means more sales are produced per dollar of working capital, indicating tighter, more productive use of short-term resources. This metric helps you compare operating efficiency across periods or between firms, keeping in mind that industry norms matter. The other options measure different things: Net Income divided by Net Sales is profit margin; Cost of Goods Sold divided by Average Inventory is inventory turnover; Net Sales divided by Current Assets is a form of asset turnover but ignores the financing component of working capital.

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