CFA Practice Question

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CFA Practice Question

Which of the following best explains a ratio of net sales to average net fixed assets that exceeds the industry average? The firm ______
A. makes less efficient use of its assets than competing firms.
B. has a substantial amount of old plants and equipment.
C. expanded its plant and equipment in the past few years, or uses straight line depreciation.
Explanation: If a firm has a high fixed asset turnover = net sales/net fixed assets, it can be implied that the firm has not built or purchased many new assets (such as plants and equipment). If the firm had recently purchased a new plant and equipment, the net fixed asset turnover would be smaller.

User Contributed Comments 5

User Comment
staudinger what does the "average" in "average net fixed assets" stand for?
abd3333 - Average would be the amounts for Beg and Ending fixed assets divided by 2.

- "Net" -------> after depreciation amount of fixed assets.

I answered this question wrong because I did not take into considerations the amount of depreciation. Obviously, with old equ and plant, the denominator will be smaller which gives a bigger ratio.
nzdavid C is wrong because straight line depreciation leads to increased net assets in the early years, and a larger denominator.
aad401 Couldnt an above average ratio simply imply higher efficiency? The ratio does not point to the age of the equipment, so doesnt the answer given force you to make not necessarily valid assumptions?
rjdelong aad4: Yes, but that is not a choice, and the question is asking you which BEST explains it, and of the other two choices A is the opposite of what you are saying so it's wrong, and C is the opposite of B, which is correct
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