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 its industry average, this could indicate that it 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 its debt 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 in option E is correct. The days sales outstanding (DSO) ratio is used to estimate the average number of days it takes for a firm to collect its accounts receivable. The DSO can be compared with the company's credit terms to determine if customers pay on time. The other options are incorrect. A decreasing Inventory Turnover Ratio suggests that the business is holding on to inventory for an extended period and may be grappling with poor inventory management or liquidity issues. A low inventory turnover ratio may signify an inadequate inventory stock or problems with inventory management. A fixed asset turnover ratio that is worse than its industry peer may suggest a lack of efficiency or an inadequate investment in fixed assets. A high debt ratio is often associated with aggressive management rather than conservative management.

Which of the Following Statements Is CORRECT