Which of the following statements is CORRECT?
A) If a security analyst saw that a firm's days' sales outstanding (DSO)was higher than the industry average and trending still higher,this would be interpreted as a sign of strength.
B) A high average DSO indicates that none of the firm's customers are paying on time.In addition,it makes no sense to evaluate the firm's DSO with the firm's credit terms.
C) There is no relationship between the days' sales outstanding (DSO)and the average collection period (ACP).These ratios measure entirely different things.
D) A reduction in accounts receivable would have no effect on the current ratio,but it would lead to an increase in the quick ratio.
E) If a firm increases its sales while holding its accounts receivable constant,then its days' sales outstanding will decline,other things held constant.

Question

Quizplus · Accepted Answer

The statement E is correct. Days' sales outstanding (DSO) measures the average number of days it takes for a firm to collect its accounts receivable, while sales are a key component of accounts receivable. Therefore, if a firm increases its sales while holding its accounts receivable constant, its DSO will decline, assuming everything else stays the same. Higher sales translate to higher collections and a lower DSO.

Which of the Following Statements Is CORRECT