Question

Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio Consider the following case: Polk Software Inc. has a quick ratio of 2.00x, $34,200 in cash, $19,000 in accounts receivable, some inventory, total current assets of $76,000, and total current liabilities of $26,600. The company reported annual sales of $600,000 in the most recent annual report. Over the past year, how often did Polk Software Inc. sell and replace its inventory? O 28.95 x O 8.01 x O 26.32 x O 2.86 x The inventory turnover ratio across companies in the software industry is 22.37x. Based on this information, which of the following statements is true for Polk Software Inc.? Polk Software Inc. is holding less inventory per dollar of sales compared to the industry average. Polk Software Inc. is holding more inventory per dollar of sales compared to the industry average.

Answer 1

As quick ratio = (Current assets - Inventory) / Current liabilities

2 = 76000 - x / 26600

x= 22800

As inventory turnover ratio = Sales/inventory

=600000/22800

=26.32x

polk inventory turnover ratio is 26.32 whereas the industry average is 22.37, the implication being it is turning its inventory faster than inventory competitors, thus it will be holding less inventory.

Polk Software Inc. is holding less inventory per dollar of sales compared to industry average.