Which of the following would generally indicate an improvement in a company's financial position, holding other...

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

Group of answer choices

The TIE coverage ratio declines.

The ROA declines.

Gross profit margin decreases.

The day sales outstanding decreases.

Expert Solution

The correct answer is - The day sales outstanding decreases.

No. of Days sales outstanding defines the no. of days it takes to collect the amount due from debtors (receivables). Lower the days sales outstanding means the company can convert their debtors into cash soon and the cash flow position of the company will be good. If this is higher, the company may face cash shortage problem. Also, the chances of bad debts will be more.

The decrease in days sales outstanding will improve company's financial position.

Other options are wrong as-

-->Gross profit is the profit left after deducting the cost of good sold from the sales to meet the other indirect expenses. If Gross profit margin decreases, the profit left for meeting indirect expenses (eg - depreciation, interest payment, rent, etc) will be less. Higher the gross profit, better it is.

--> Time interest earned (TIE) coverage ratio is the ratio of earnings before interest and tax to the total interest payments. It tells how many times the profit is for paying the interest liability. Higher the ratio better it is as the chances of defaulting on payment of interest will be lower.

--> ROA is the return the company is earning on the assets. HIgher the ROA better it is. Lower the ROA suggests the company's performance is decreasing.

Hope it helps!

jeff jeffy answered 2 years ago

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