Firm A: Firm B: Assets Assets Current assets 4 Current assets 7 Fixed assets 10

Question

Firm A:                                                         Firm B:

Assets                                                           Assets

        Current assets          4                                Current assets          7

        Fixed assets            10                                Fixed assets              7

        Total assets            14                                Total assets            14

Firm A:                                                         Firm B:

       Total sales                12                                Total sales              12

       Cost of sales             -5                                Cost of sales            -7

Gross Profit                      7                                Gross Profit              5

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?

A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.

C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.

D) Fixed asset turnover ratios indicate that firm A is generating more sales for the assets it employs than firm B.

B) Fixed asset turnover ratios indicate that firm A is generating fewer sales for the assets it employs than firm B.

A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.

C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.

D) Fixed asset turnover ratios indicate that firm A is generating more sales for the assets it employs than firm B.

B) Fixed asset turnover ratios indicate that firm A is generating fewer sales for the assets it employs than firm B.

Explanation / Answer

A).

Aset Turnover Ratio = Net Sales/Net Total Assets

Asset Turnover Ratio of A = 12/14 = 0.8571

Asset turnover Ratio of B = 12/14 = 0.8571

Since we can see that Asset Turnover ratio is same for both A and B, it is not true.

C).Fixed Asset Turnover Ratio = Net Sales/Net Fixed Assets

Fixed Asset Turnover Ratio of A = 12/10 = 1.2

Fixed Asset Turnover Ratio of B = 12/7 = 1.7142

Here it can be seen that the Fixed Asset Turnover of B is Greater than A, hence Option B generates more revenue per fixed Asset. Thus Optioni C is incorrect.

D). The ratio shows otherwise, Firm B shows more revenue generation by B, than A.So its false

B) This is Correct. Firm B generates more revenue per fixed assets than Firm A.

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