Impact of Asset Age on Financial Ratios

Question: 

Which of these statements is true?

A) The age of a firm’s fixed assets will affect the current ratio level.

B) The age of a firm’s cash will affect the current ratio level.

C) The age of a firm’s fixed assets will affect the fixed asset turnover ratio level.

D) The age of a firm’s accounts receivable will affect the current ratio level.

Answer:

C) The age of a firm’s fixed assets will affect the fixed asset turnover ratio level.

Explanation: The fixed asset turnover ratio measures how efficiently a firm uses its fixed assets to generate sales. It is calculated as:

Fixed Asset Turnover Ratio = Net Sales/Average Net Fixed Assets​

As fixed assets age, they might become less efficient or outdated, which could impact their productivity and, consequently, the fixed asset turnover ratio. Older fixed assets might also have higher depreciation, affecting their book value and the ratio calculation.