Asked by Teresa Pardo Álvarez on Jun 20, 2024
Verified
If a firm's sales are held constant, an increase in inventory would increase both the current ratio and inventory turnover.
Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over a period.
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.
- Understand the concept of liquidity and how it is measured through ratios.
- Comprehend the relationship between sales, inventory, and the financial ratios.
Verified Answer
MJ
Michael JuarezJun 25, 2024
Final Answer :
False
Explanation :
An increase in inventory would increase the current assets of the firm, which would increase the current ratio. However, an increase in inventory would decrease the inventory turnover ratio as it would take longer to sell the additional inventory. Therefore, the statement is false.
Learning Objectives
- Understand the concept of liquidity and how it is measured through ratios.
- Comprehend the relationship between sales, inventory, and the financial ratios.