(from Schweser QBank) Company A recently reclassified many of their assets such that the average useful life of their depreciable assets was reduced. Which of the following is the most likely result from this change on net income and inventory turnover? (Assume everything else remains constant.) Net income will: A) decrease and inventory turnover may or may not change. B) increase and inventory turnover will not change. C) decrease and inventory turnover will rise. Your answer: C was incorrect. The correct answer was A) decrease and inventory turnover may or may not change. How does depreciation relates inventory turnover? Thanks.
Usually, inventory is bought/sold through out the year often enough that it is not depreciated. Depending on the business, long lived inventory may eventually be depreciated, or done regularly. The idea here is not automatically looking at assets and seeing inventory too. Most of the companies that may depreciate inventory do so case by case. In the question, you know NI will decrease regardless, but the TO depends. Hope this helps.