Final answer:
Activity ratios measure how well a company uses its assets to generate sales, not the degree of protection for long-term creditors and investors. Solvency and coverage ratios are more appropriate for assessing long-term financial protection.
Step-by-step explanation:
The statement "Activity ratios measure the degree of protection for long-term creditors and investors" is false. Activity ratios, also known as efficiency ratios or asset utilization ratios, are used to measure how well a company uses its assets to generate sales and maximize efficiency. They include ratios such as inventory turnover, accounts receivable turnover, and asset turnover. These ratios focus on the operational performance and efficiency of a company rather than the protection of long-term creditors and investors.
Protection for long-term creditors and investors is typically assessed through solvency ratios and coverage ratios, which evaluate a company's ability to meet its long-term obligations and the risks associated with lending to or investing in the company. Solvency ratios include metrics like debt-to-equity and interest coverage ratio, which provide insight into financial stability and the capacity to pay interest and principal on outstanding debts.
Activity ratios measure how effectively a company is utilizing its assets to generate revenue. They do not specifically measure the degree of protection for long-term creditors and investors. Some examples of activity ratios include inventory turnover ratio, accounts receivable turnover ratio, and asset turnover ratio.