The Current and Inventory Turnover Ratios Both Help Us Measure

question 16

True/False

The current and inventory turnover ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

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Definitions:

Marginal Cost

Marginal cost is the additional cost incurred from producing one more unit of a good or service, vital for decision-making on production levels.

Purely Competitive Firm

A company in a market where there are many buyers and sellers, the products are homogeneous, and there are no barriers to entry or exit, leading to zero economic profit in the long run.

Sinking Funds

Specialized funds set aside or saved by a company to repay debt or bonds, or to replace capital assets in the future.

Unrecoverable Costs

Expenses that have been paid and cannot be recovered, often referred to as sunk costs, which should not factor into future spending decisions.