Question

You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $400,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $1,020,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows Data Collected (in dollars) Accounts receivable Net fixed assets Total assets Like Games 10,800 220,000 380,000 Our Play 15,600 320,000 500,000 Industry Average 15,400 867,000 938,400 Using this information, complete the following statements to include in your analysis days of sales outstanding represents an efficient credit and collection policy. Between the two companies, IS collecting cash from its customers faster than average 2. Our Play's fixed assets turnover ratio is the acquisition cost of its fixed assets is 3. Like Games's total assets turnover ratio is general, a higher total assets turnover ratio indicates greater efficiency , but both companies are collecting their receivables less quickly than the industry than that of Like Games. This could be because Our Play is a relatively new company, so than the recorded cost of Like Games's net fixed assets which is than the industry's average total assets turnover ratio. In

Answer 1

Like Games Inc.:

Days Sales Outstanding = 365 * Accounts Receivable / Sales
Days Sales Outstanding = 365 * $10,800 / $400,000
Days Sales Outstanding = 9.86 days

Fixed Assets Turnover = Sales / Net Fixed Assets
Fixed Assets Turnover = $400,000 / $220,000
Fixed Assets Turnover = 1.82 times

Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $400,000 / $380,000
Total Assets Turnover = 1.05 times

Our Play Inc.:

Days Sales Outstanding = 365 * Accounts Receivable / Sales
Days Sales Outstanding = 365 * $15,600 / $400,000
Days Sales Outstanding = 14.24 days

Fixed Assets Turnover = Sales / Net Fixed Assets
Fixed Assets Turnover = $400,000 / $320,000
Fixed Assets Turnover = 1.25 times

Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $400,000 / $500,000
Total Assets Turnover = 0.80 times

Industry Average:

Days Sales Outstanding = 365 * Accounts Receivable / Sales
Days Sales Outstanding = 365 * $15,400 / $1,020,000
Days Sales Outstanding = 5.51 days

Fixed Assets Turnover = Sales / Net Fixed Assets
Fixed Assets Turnover = $1,020,000 / $867,000
Fixed Assets Turnover = 1.18 times

Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $1,020,000 / $938,400
Total Assets Turnover = 1.09 times

A low days sales outstanding represents an efficient credit and collection policy. Between the two companies, Like Games Inc. is collecting cash from its customers faster than Our Play Inc., but both companies are collecting their receivables less quickly than the industry average.
Our Play’s fixed-asset turnover ratio is lower than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition costs of its fixed assets is higher than the recorded cost of Like Games’s net fixed assets.
Like Games’s total asset turnover ratio is 1.05, which is lower than the industry’s average total asset turnover ratio. In general, a higher total asset turnover ratio indicates greater efficiency.