3. Asset management ratios Asset management ratios are used to measure how effec
ID: 2613880 • Letter: 3
Question
3. Asset management ratios Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fioxed asset turnover ratio, and the total asset turnover ratio. Consider the following case: Graham Pharmaceuticals has a quick ratio of 2.00x, $31,500 in cash, $17,500 in accounts receivable, some inventory, total current assets of $70,000, and total current liabilities of $24,500. The company reported annual sales of $100,000 in the most recent annual report. Over the past year, how often did Graham Pharmaceuticals sell and replace its inventory? 0 4.76 x O 8.01 x O 2.86 x O 5.24 x The inventory turnover ratio across companies in the pharmaceutical Industry is 5.24x. Based on this information, which of the following statements is true for Graham Pharmaceuticals? O Graham Pharmaceuticals is holding less inventory per dollar of sales compared to the industry average. O Graham Pharmaceuticals is holding more inventory per dollar of sales compared to the industry average.Explanation / Answer
Quick Ratio= current assets-inventory/current liabilities
2=(70,000-X)/24500
X=70,000-49000
=21,000.
Therefore inventory = 21,000
However sales = $100000
Sell and replace of inventory=100000/21,000=4.76 times.
Graham Pharma has replaced its inventory less than the industry standard, therefore it is holding more inventory per dollar of sales than the industry average.
Question 2)
Sales of these companies=$100,000
Sales of industry=255,000 Assumption of all sales are credit sales.
Days of sales outstanding= (accounts receivable/Credit sales)*365
Industry=(3850/255000)*365
=5.51 days
Like games=(2700/100000) * 365
=9.855 days
OurPlay=3900/100000 * 365
=14.23 days
THerefore
1 5.51 days , Like games, Our play.
2. Asset turnover= Sales/fixed assets
Like games=100000/55000=1.818
Our Play=100000/80000=1.25
2 answers 45% more than(1.818/1.25 -1) 2 blank answer greater
3 fixed asset turnover= Sales/Fixed assets
Industry=255,000/234600=1.0869
Like games=100000/95000=1.05263
Answers are 1.05263 and less than
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