Activity Ratios: Inventory Turnover and Days of Inventory on Hand (DOH)

Of the following, an increasing current ratio with a decreasing quick ratio means:

Incorrect. Improving inventory turnover would lead to a falling current ratio.

Correct. A primary difference between the current ratio and the quick ratio is the inclusion of inventory in the current ratio but not in the quick ratio. Improving receivables management leads to lower receivables. Since receivables is a component of the numerator in both the current and the quick ratio, the quick ratio will decrease. Decreasing inventory turnover leads to higher level of inventory. Since inventory is a component of the numerator in the current ratio, increasing inventory will increase the current ratio. Since inventory is only considered in the current ratio and not the quick ratio, the increase in inventory will have no effect on the quick ratio.

Incorrect. Increasing days sales outstanding would increase receivables, resulting in an increasing quick ratio.

improving inventory turnover and days sales outstanding.

decreasing inventory turnover and improving receivables management.

improving inventory management and increasing days sales outstanding.