Aa Aa Asset management ratios sset management ratios are used to measure how eff
ID: 2620447 • Letter: A
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Aa Aa Asset management ratios sset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a articular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include he average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and t otal asset turnover ratio. he onsider the following case: rockett Electronics has a quick ratio of 2.00x, 30,150 in cash, $16,750 in accounts receivable, some inventory, total current assets of $67,000, and total current liabilities of $23,450. The company reported annual sales of $800,000 in the most recent annual report Over the past year, how often did Crockett Electronics sell and replace its inventory? 39.80 x O 2.86 x O 8.01 x O 43.78 x The inventory turnover ratio across companies in the electronics industry is 43.78x. Based on this information, which of the following statements is true for Crockett Electronics? O Crockett Electronics is holding more inventory per dollar of sales compared to the industry average. O Crockett Electronics is holding less inventory per dollar of sales compared to the industry average.Explanation / Answer
Answer a.
Current Assets = Cash + Accounts Receivable + Inventory
$67,000 = $30,150 + $16,750 + Inventory
Inventory = $20,100
Inventory Turnover = Sales / Inventory
Inventory Turnover = $800,000 / $20,100
Inventory Turnover = 39.80 x
Answer b.
Crockett Electronics is holding less inventory per dollar of sales compared to the industry average.
Answer c.
Like Games:
Days sales outstanding = 365 * Accounts receivable / Sales
Days sales outstanding = 365 * $21,600 / $800,000
Days sales outstanding = 9.86 days
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
Fixed Assets Turnover Ratio = $800,000 / $440,000
Fixed Assets Turnover Ratio = 1.82
Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $800,000 / $760,000
Total Assets Turnover = 1.05
Our Play:
Days sales outstanding = 365 * Accounts receivable / Sales
Days sales outstanding = 365 * $31,200 / $800,000
Days sales outstanding = 14.24 days
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
Fixed Assets Turnover Ratio = $800,000 / $640,000
Fixed Assets Turnover Ratio = 1.25
Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $800,000 / $1,000,000
Total Assets Turnover = 0.80
Industry Average:
Days sales outstanding = 365 * Accounts receivable / Sales
Days sales outstanding = 365 * $30,800 / $2,040,000
Days sales outstanding = 5.51 days
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
Fixed Assets Turnover Ratio = $2,040,000 / $1,734,000
Fixed Assets Turnover Ratio = 1.18
Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $2,040,000 / $1,876,800
Total Assets Turnover = 1.09
1. A 5.51 days of sales outstanding represents an efficient credit and collection policy. Between the two companies, Like Games is collecting cash from its customers faster than Our Play, but both companies are collecting their receivables less quickly than the industry average.
2. Our Play’s fixed assets turnover ratio is lower than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition cost of its fixed assets is higher than the recorded cost of Like Games’s net fixed assets.
3. Like Games’s total assets turnover ratio is 1.05 times, which is lower than the industry’s average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.
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