4. Which of the following statements is (are) correct? eral, a higher inventory

Question

4. Which of the following statements is (are) correct? eral, a higher inventory turnover is desired because the firm will minimize the costs of holding inventory if the turnover is high instead of low. (y) A firm may strive for a high average payment period because it wants to pay for its purchases as s lowly as possible to maintain a higher cash balance. (z) If the fixed asset turnover ratio is extremely low then the firm's fixed assets are idle too much and the fim has much less production capacity than the production dictated by customer orders A. (x), (y) and (2) B. (x) and (y) only C. (x) and (z) only D. (y) and (2) only E. (y) only

Explanation / Answer

Option C is correct, that is x and Z are correct.

Higher inventory turnover ratio is good, it shows the higher minimal holding of inventory and thereby decreasing in the holding cost.

Lower fixed assets turnover ratio indicates poor performance and ineffective usage of assets for generation of the revenue, hence X and Z are correct.

A firm will never strive for high average payment, as it receives trade discounts by paying timely and high average payment will cost more for the firm, as interest is need to be paid on payments if it will not pay on time, so, a firm will not desire for higher average payment, hence option y is incorrect

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