Question

LITU. ASSI CI L'Alloy SIS UI Pillalillal slaternells 2. Asset management ratios 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 Lype 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 tumover ratio. Consider the following case: Crawford Construction has a quick ratio of 2.00%, $32,175 in cash, $17,875 in accounts receivable, some inventory, total current assets of $71,500, and total current liabilities of $25,025. The company reported annual cost of goods sold of $300,000 in the most recent annual report. Over the past year, how often did Crawford Construction sell and replace its inventory? 08.01 x 15.39 x 2.86 x 13.99 The inventory turnover ratio across companies in the construction industry is 15.39x. Based on this information, which of the following statements is true for Crawford Construction? Crawford Construction is holding less inventory per dollar of sales compared to the industry average. Crawford Construction is holding more inventory per dollar of sales compared to the industry average. 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 $300,000 cach. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $765,000. As an analyst, you want to make comments on the expected performance of these two companies in the corring year. You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Accounts receivable Net fixed assets Total assets Data Collected (in dollars) Like Games Our Play 8,100 11,700 165,000 240,000 285,000 375,000 Industry Average 11,550 650,250 703,800 Using this information, complete the following statements to include in your analysis. than the industry average. It takes Our Play time to 1. Our Play has days of sales tied up in receivables, which is much collect cash from its customers than it takes Like Games. 2. Like Games's fixed assets turnover ratio is than that of Our Play. This is because Like Games was formed cight years ago, so the acquisition cost of its fixed assets is recorded at historic values when the company bought its assets and has been depreciated since then. Assurring that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a __ amount for its fixed assets. 3. The average total assets turnover in the electronic toys industry is , which means that of sales is being generated with every dollar of investment in assets. A total assets turnover ratio indicates greater efficiency. Both companies' total assets turnover ratios are than the industry average. Grade It Now Save & Continue Continue without saving

Answer 1

Answer a.

Current assets = Cash + Accounts receivable + Inventory
$71,500 = $32,175 + $17,875 + Inventory
Inventory = $21,450

Inventory turnover = Cost of Goods Sold / Inventory
Inventory turnover = $300,000 / $21,450
Inventory turnover = 13.99 x

Answer b.

Crawford Construction is holding more inventory per dollar of sales compared to the industry average.

Answer c.

Like Games:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $8,100 / $300,000
Days of sales outstanding = 9.86 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $300,000 / $165,000
Fixed assets turnover = 1.82 times

Total assets turnover = Sales / Total assets
Total assets turnover = $300,000 / $285,000
Total assets turnover = 1.05 times

Our Play:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $11,700 / $300,000
Days of sales outstanding = 14.24 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $300,000 / $240,000
Fixed assets turnover = 1.25 times

Total assets turnover = Sales / Total assets
Total assets turnover = $300,000 / $375,000
Total assets turnover = 0.80 times

Industry Average:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $11,550 / $765,000
Days of sales outstanding = 5.51 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $765,000 / $650,250
Fixed assets turnover = 1.18 times

Total assets turnover = Sales / Total assets
Total assets turnover = $765,000 / $703,800
Total assets turnover = 1.09 times

Our Play has 14.24 days of sales tied up in receivables, which is much higher than the industry average. It takes Our Play more time to collect cash from its customers than it takes Like Games.

Like Games’s fixed assets turnover ratio is higher than that of Our Play. This is because Like Games was formed eight years ago, so the acquisition cost of its fixed assets is recorded at historic values when the company bought its assets and has been depreciated since then, Assuming that fixed assets price (not book values) rose over the past six years due to inflation, Our Play paid a higher amount for its fixed assets.

The average total assets turnover in the electronic toys industry is 1.09x, which means that $1.09 of sales is being generated with every dollar of investment in assets. A higher total assets turnover ratio indicates greater efficiency. Both companies’ total assets turnover ratios are lower than the industry average.