Question

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

a) The DSO decreases.
b) The inventory and total assets turnover ratios both decline.
c) The debt ratio increases.
d) The ROA decreases.
e) The MV/BV ratio increases.

Answer 1

a) The DSO decreases.

Explanation:

DSO is short for Days Sales Outstanding and it is a measure of how quickly a company can convert its accounts receivable to cash. A company is described as strong when it has enough cash flow and this can be achieved by reducing the length of days within which accounts receivable can be converted to cash.

For the company to achieve a lowered DSO, it must ensure that customers with bad or low credit ratings are not allowed, or reasonably reduced in the business. The accounting and payment procedures must also be checked to be expedient so that delays in payment procedures would be reasonably reduced.