Good Test of Ratio Knowledge

If gross profits rise, operating profits are flat, and capital spending declines, which of the following ratios is most likely to rise? A) Inventory turnover. B) Financial leverage. C) Return on equity. D) Return on assets.



I say D NI stays the same Assets Decline



A, either sales increased or cogs decreased.

But ROA is measured as beginning Assets. I would thing A as well.

well it cant be A as operating profits are flat tht means there is an increase in W capital its NOT likely well ??? still steady on D as Assets decline due depreciation and no new assets being added

wanderingcfa Wrote: ------------------------------------------------------- > A, either sales increased or cogs decreased. You don’t know which. I thought ROA is measured with average assets. Is that wrong?

if there is some kind of inventory liquidation wouldn’t you expect a change in operating profits?

That’s probably right, usually in the questions they till you which to use and 90% of the time I see beginning.

Good point Nib, but GP margin can increase without changing COGS, right?

Gross profit inc and flat op. profit implies reduced COGS. This might suggest LIFO liquidation, or that LIFO inventory is getting cheaper and stock is growing. So (a) is inconclusive. (b) and © are bullsh1t. So D

AFjunkie an ans would be appreciated

amene moi un poisson. D is it.

sorry Florin, I was enjoying the debate. The answer is A.

its A

F@@@ck any explanation?