UUP Inc.is very conservatively managed and nothing ever changes - their sales are constant over time,the collection periods stay the same,and the firm has not invested in any new assets.An investor is puzzled - she has found the fixed asset turnover rate is changing over time.How can the apparent efficiency with which the firm uses its assets be changing if all other items aren't changing?
A) This observation is impossible; she must have miscalculated something.
B) This observation is possible; the fixed asset turnover must increase in this case due to depreciation.
C) This observation is possible; the fixed asset turnover must decrease in this case due to depreciation.
D) This observation is possible; she should look at net income and not sales - it is a better measure of the firm's efficiency and productivity.

Question

Quizplus · Accepted Answer

Even if the total sales of UUP Inc. are constant over time, the value of its fixed assets (e.g., equipment, buildings) will decrease due to depreciation. As a result, the denominator in the fixed asset turnover ratio will decrease over time, which will increase the ratio itself. This does not necessarily mean that the firm is becoming more efficient, but rather that its assets are losing value.

UUP IncIs Very Conservatively Managed and Nothing Ever Changes - Their