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 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 choice E is correct. The days sales outstanding ratio is a measure of a firm's accounts receivable management and indicates how long it takes for the firm to collect payment after a sale is made. By comparing the DSO to the firm's credit terms, analysts can assess whether customers are paying on time or not. The other statements are incorrect. A higher inventory turnover ratio indicates that the firm is selling its inventory more frequently and is therefore more efficient. It is generally better to have a higher inventory turnover ratio since it indicates that the firm is selling inventory more quickly. If a firm's fixed assets turnover ratio is lower than its industry average, it suggests that the firm is not using its fixed assets efficiently and may need to add more fixed assets or improve their utilization. The debt ratio is a measure of a firm's leverage and is not related to the conservatism of its management.

Which of the Following Statements Is CORRECT