Jim Short\'s Company makes clothing for schools. Sales in 2010 were $4,000,000.

Question

Jim Short's Company makes clothing for schools. Sales in 2010 were $4,000,000. Assets were as follows: Cash($100,000), Accounts receivables($800,000) Inventory($400,000) Net equipment($500,000) Total assets ($1,8000,000): a. Compute the following:Accounts receivable turnover, Inventory turnover, fixed asset turnover, and Total asset turnover. b. In 2011, sales increased to $5,000,000 and the assets for that year were as follows;Cash ($100,000), Acounts receivables ($900,000), Inventory ($975,000), Net equipment ($500,000), Total assets ($2,475,000).

Compute the four ratios.

C. is there a improvement or a decline in total asset turnover, and based on the other ratios , indicate why this devlopment has taken place.

Explanation / Answer

a. 1.    Accounts receivable turnover = Sales/Accounts Receivable

4,000,000/800,000= 5X

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2.    Inventory turnover = Sales/Inventory

4,000,000/400,000= 10X

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3.    Fixed asset turnover = Sales/(Net Plant & Equipment)

4,000,000/500,000= 8X

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4.    Total asset turnover = Sales/Total Assets

4,000,000/1,800,000= 2.22X

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b. 1.    Accounts receivable turnover

5,000,000/900,000= 5.56X

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2.    Inventory turnover

5,000,000/975,000= 5.13X

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3.    Fixed asset turnover

5,000,000/500,000= 10.00 X

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4.    Total asset turnover

5,000,000/2,475,000= 2.02X

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c. There is a decline in total asset turnover from 2.22 to 2.02. This development has taken place because of the slowdown in inventory turnover (10x down to 5.13x). The other two ratios are slightly improved.

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