CFA Practice Question
Which of the following ratios evaluates the effectiveness with which a company uses its assets?
B. Yes : No
C. No : No
Receivables Turnover : Interest Coverage
A. Yes : Yes
B. Yes : No
C. No : No
Correct Answer: B
Since receivable turnover is equal to net credit sales divided by average net receivables, this ratio provides information related to how many times the company has been able to convert net receivables (assets) into cash during the period. Interest coverage, on the other hand, provides information about a firm's ability to generate a sufficient level of operating profits to cover interest expense on related debt obligations.
User Contributed Comments 7
| User | Comment |
|---|---|
| mtcfa | Somewhat tricky. Rec turnover involves an asset, but does it really have anything to do with how a firm is USING its assets, like PPE? |
| gth763s | Receivable turnover measures internal liquidity. |
| thud | I agree with mtcfa. |
| RCapistrano | "Somewhat tricky. Rec turnover involves an asset, but does it really have anything to do with how a firm is USING its assets, like PPE?" I do agree with this statement. How I've had to think about this is the following: When deriving the CFO (cash flow from operations) using the indirect method, an increase in A/R(accounts receivable) is subtracted from Net Income. Uses of assets are always subtracted; therefore, this decrease is a form of "uses of assets." I hope this helps and that it's accurate. If I'm viewing this incorrectly, I would appreciate any input. Thanks. |
| reganbaha | It measures how quickly a firm gets the cash. cash is an asset. |
| johntan1979 | The last time I checked, receivables is an asset. Don't think too much or too hard. Don't make the CFA exam harder than it already is. |
| ascruggs92 | mtcfa, selling inventory is typically the main source of revenue generation. Considering that revenue generation is the main object of all companies, long term assets such as PP&E are investments made to create revenue generation, meaning inventory turnover has everything to do with use of assets |