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, $32,850 in cash, $18,250 in accounts receivable, some inventory, total current assets of $73,000, and total current liabilities of $25,550. The company reported annual sales of $100,000 in the most recent annual report.

Answer 1

Quick ratio = 2

Quick Assets/Current Liabilities = 2

Quick Assets = 2*25,550

= $51,100

Inventory = Current Assets – Quick Assets

= 73,000 -51,100

= $21,900

Inventory turnover ratio = Sales/Inventory

= 100,000/21,900

= 4.566 times

i.e. 4.57x

Adams Furniture is holding more inventory per dollar of sales compared to industry average

Days Sales outstanding = 365*accounts receivables/sales

Like Games = 365*2700/100,000 = 9.855 days

Our Play = 365*3900/100,000 = 14.235 days

Industry Average = 365*3850/255,000 = 5.511 days

Fixed Assets turnover ratio = sales/fixed assets

Like games = 100,000/55,000 = 1.82 times

Our play = 100,000/80,000 = 1.25 times

Total Asset Turnover ratio = Sales/Total Assets

Like Games = 100,000/95,000 = 1.05

Our play = 100,000/125,000 = 0.8

Industry Average = 255,000/234,600 = 1.09

1.A lower/less DSO represents efficient credit policy. Like games is collecting cash faster Our Play.

2.Our play’s fixed asset turnover ratio is lower than Like games. Acquisition cost is MORE

3.Like games total asset turnover ratio is 1.05, which is LOWER