Which of the following statements is CORRECT?
A) A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position,i.e. ,that it is becoming more liquid.
B) In general,it's better to have a low inventory turnover ratio than a high one,as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
C) If a firm's fixed assets turnover ratio is significantly lower than the average for its industry,then it could be that the firm uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
D) The more conservative a firm's management is,the higher the firm's total debt to total capital ratio is likely to be.
E) The days sales outstanding ratio tells us how long it takes,on average,to collect after a sale is made.The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Question

Quizplus · Accepted Answer

The statement about the days sales outstanding ratio accurately describes what it measures and how it can be used to evaluate a firm's collection practices. The other statements are incorrect. A decline in the inventory turnover ratio suggests that the firm is becoming less liquid and may have excess inventory, not improving its liquidity position. A high inventory turnover ratio is generally preferable as it indicates that the firm is selling its inventory quickly and efficiently. A lower fixed assets turnover ratio suggests that the firm is less efficient in using its fixed assets, not more efficient or operating at over capacity. The total debt to total capital ratio is not necessarily related to a firm's management conservatism.

Which of the Following Statements Is CORRECT