QUESTION 6 Which of the following statements is true? e) The accounts receivable
ID: 2564558 • Letter: Q
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QUESTION 6 Which of the following statements is true? e) The accounts receivable and inventory turnover ratios do not impact changes in the total asset turnover ratio. O The fixed asset turnover is calculated by dividing net income by total assets. OIncreasing the fixed and total asset turnover ratios is desirable since the higher the ratio, the smaller the investment required to generate sales and thus the more profitable is the firm. OIt is desirable for firms to invest as much money as possible into all types of assets in order to increase the asset turnover ratios. QUESTION 7 All of the following statements are true except: The amount and proportion of debt in a company's capital structure is extremely important to the financial analyst because of the trade-off between risk and return. A firm with too much debt may have difficulty obtaining additional debt financing when needed or finds that credit is available only at extremely high rates of O Having debt is always risky and does not provide increased benefits to the firm's owners. Failure to satisfy the fixed charges associated with debt will ultimately result in bankruptcy.Explanation / Answer
Answer 6
The accounts receivable and inventory turnover ratio do not impact changes in total asset turnover ratio - True
Explanation :
total asset turnover ratio = Net sales / Average total asstes
Where as inventory turnover ratio = COGS / Average Inventory
Thus we can see that nither accounts recivable nor inventory turnover ratio is considered for calculation of total asset turnover ratio as it is based on net sales & not COGS or accounts recivable
Answer 7
having debt is always risky and does not provide increase befinif to firms owner - False
Explanation - Though debt is risky as say in case of bankruptcy they are needed to satisfy first before the firm's owner. But it is not true that debt does not provide incresed benefits to the firm's owner . Every business goal is to maximise the wealth of its owner and the primary objective to go for debt financing is to provide the leverage benefit to the firm's owner . Moreover debt interest is an tax saving expenses which have a positive impact on firm's net profit.
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