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 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 in option E is correct as it accurately describes the days sales outstanding (DSO) ratio and how it can be used to assess customer payment patterns. The other statements in options A, B, C, and D are all incorrect or misleading. Option A is incorrect as a decline in inventory turnover ratio suggests poor inventory management and reduced liquidity. Option B is incorrect as a high inventory turnover ratio generally indicates efficient inventory management and liquidity. Option C is incorrect as a low fixed assets turnover ratio suggests poor efficiency in using fixed assets and may not necessarily indicate overcapacity, while a high ratio indicates efficient use of fixed assets. Option D is incorrect as more conservative management is associated with lower debt levels and higher equity levels, resulting in a lower total debt to total capital ratio.

Which of the Following Statements Is CORRECT