DECA Retail Merchandising Practice Exam

What does asset turnover measure?

1. Efficiency of generating sales

2. Liquidity of short-term obligations

3. Profit margin relative to sales

4. Cost management of operations

The correct answer is: Efficiency of generating sales

Asset turnover measures the efficiency of generating sales from the assets a company owns. Specifically, it is a financial ratio that indicates how effectively a business is using its assets to produce revenue. A higher asset turnover ratio suggests that the company is utilizing its assets more efficiently to generate sales, which can be a positive indicator of operational performance. This measurement is crucial for understanding how well a company is leveraging its resources. Companies with higher asset turnover can typically generate more sales with less investment in assets, which often translates to better overall financial health. In a retail context, this could imply effective inventory management and space utilization, leading to higher sales relative to asset investment. The other options relate to different aspects of financial performance; for instance, liquidity focuses on short-term obligations, profit margin addresses the relationship between profit and sales revenue, and cost management pertains to expense control. However, none of these specifically capture the essence of how well a company utilizes its assets to drive sales, which is the core focus of asset turnover.