An auto parts store must maintain inventory of a wide variety of parts to satisfy its diverse customer base. As a result, the store’s inventory has a high risk of obsolescence. Which of the following features would be most desirable to the store's creditors during a financial review of the auto parts store?
a.A high quick ratio.
b.A high debt ratio.
c.A high number of days' sales outstanding in ending trade receivables.
d.A low inventory turnover ratio.
Answer:A
Choice "a” is correct. A high quick (acid test) ratio is most desirable to the store's creditors because it indicates the company has more liquid short-term assets on its balance sheet. This is important given that the store's inventory needs are high in order to satisfy its diverse customer base.
Choice “b” is incorrect. A high debt ratio would not be desirable to the store's creditors, as it indicates that the company has high financial leverage on its balance sheet.
Choice “c" is incorrect. Having a high days’ sales outstanding ratio would not be desirable to the store's creditors because the trade receivables are deemed to have a long collection period. In contrast, a low number of days' sales outstanding ratio indicates the company is getting its cash faster from its customers.
Choice “d” is incorrect. A low inventory turnover ratio is not desirable to the store’s creditors because inventory is staying on the store shelves longer and is taking longer to convert to cash.
