General Studies · Ratio Analysis

An overview of Activity Ratios, also known as Turnover or Efficiency Ratios. These ratios are employed to evaluate how effectively a firm manages its various assets, such as inventory, receivables, and fixed assets, to generate revenue. In the banking sector, these ratios are indispensable for assessing the working capital cycle of a borrower. A higher turnover ratio generally signifies better utilization of assets and higher efficiency, whereas a lower ratio indicates that assets are sitting idle or are not being used to their full potential. These ratios are often used in conjunction with 'holding periods' to understand the number of days funds are blocked in each stage of the operating cycle. Based on the summary provided, consider the following five statements regarding Activity Ratios: Statement I: The Inventory Turnover Ratio is calculated by dividing the Net Sales by the Average Inventory, and it helps in identifying the frequency with which the stock is replaced during the accounting period. Statement II: A very high Creditors Turnover Ratio is always a positive sign for a bank, as it indicates that the company is enjoying a long credit period from its suppliers, thereby reducing its need for bank finance. Statement III: The Working Capital Turnover Ratio measures the efficiency with which a firm's net working capital is used to support its sales volume, with a higher ratio suggesting more intensive use of working capital. Statement IV: The Fixed Assets Turnover Ratio is particularly important for manufacturing concerns with heavy machinery, as a declining trend in this ratio could indicate that the company's production capacity is becoming obsolete or underutilized. Statement V: The Cash Conversion Cycle (CCC) is a comprehensive metric that combines the inventory holding period, the debtors collection period, and the creditors payment period to find the net time a rupee is tied up in operations. Which of the following statements are correct based on standard accounting principles?