The Speed-O Company makes scooters for kids. Sales in 2008 were $8,000,000. Asse

Question

The Speed-O Company makes scooters for kids. Sales in 2008 were
$8,000,000. Assets were as follows:

Cash………………………… $200,000
Accounts receivable……….1,600,000
Inventory…………………… 800,000
Net plant and equipment…1,000,000
Total assets…………………$3,600,000

a. compute the following
accounts receivable turnover
Inventory turnover
fixed asset turnover
total asset turnover

b. in 2009, sales increased to $ 10,000,000 and the assets for that year
were as follows

cash………………………. $200,000
accounts receivable……..1,800,000
inventory……………….. 2,200,000
net plant and equipment..1,050,000
Total assets……….. $5,250,000

once again, compute the four ratios:

c. indicate if there is an improvement or decline in total asset
turnover, and based on the other ratios, indicate why this development has taken place

Explanation / Answer

a) Computing the ratios: Accounts receivable turnover ratio = Sales / Accounts receivables                                                      = $8,000,000 / $1,600,000                                                      = 5 times Inventory turnover ratio = Net sales / Inventory                                     = $8,000,000 / $800,000                                     = 10 times Fixed asset turnover ratio = Sales / Total fixed assets                                         = $8,000,000 / $1,000,000                                         = 8times Total asset turnover ratio = Sales / Total assets                                       = $8,000,000 / $3,600,000                                       = 2.2 times b) Computing the four ratios after the changes were made: Accounts receivable turnover ratio = Sales / Accounts receivables                                                      = $10,000,000 / $1,800,000                                                      = 5.56 times Inventory turnover ratio = Net sales / Inventory                                     = $10,000,000 / $2,200,000                                     = 4.5times Fixed asset turnover ratio = Sales / Total fixed assets                                         = $10,000,000 / $1,050,000                                         = 9.5 times Total asset turnover ratio = Sales / Total assets                                       = $10,000,000 / $5,250,000                                       = 1.9 times c) The total asset turnover ratio has declined from 2008 to 2009 as the sales figure has been increased. When compared to 2008, the accounts receivable turnover ratio has been increased in 2009.With increase in sales and with increase in accounts receivables, the ratio has increased from 5 times to 5.56 times. The inventory turnover ratio has declined from 2008 to 2009. With increase in invenotry and sales, the turnover ratio has declined from 10 times to 4.5 times. The fixed asset turnover ratio has also been increased from 2008 to 2009. This is due to increase in sales and Fixed assets. The ratio has increased from 8 times to 9.5 times. Accounts receivable turnover ratio = Sales / Accounts receivables                                                      = $10,000,000 / $1,800,000                                                      = 5.56 times Inventory turnover ratio = Net sales / Inventory                                     = $10,000,000 / $2,200,000                                     = 4.5times Fixed asset turnover ratio = Sales / Total fixed assets                                         = $10,000,000 / $1,050,000                                         = 9.5 times Total asset turnover ratio = Sales / Total assets                                       = $10,000,000 / $5,250,000                                       = 1.9 times c) The total asset turnover ratio has declined from 2008 to 2009 as the sales figure has been increased. When compared to 2008, the accounts receivable turnover ratio has been increased in 2009.With increase in sales and with increase in accounts receivables, the ratio has increased from 5 times to 5.56 times. The inventory turnover ratio has declined from 2008 to 2009. With increase in invenotry and sales, the turnover ratio has declined from 10 times to 4.5 times. The fixed asset turnover ratio has also been increased from 2008 to 2009. This is due to increase in sales and Fixed assets. The ratio has increased from 8 times to 9.5 times.

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