Question

Chapter 4 Assignment 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 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: Crockett Electronics has a quick ratio of 2.00x, $30,150 in cash, $16,750 in accounts receivable, some inventory, total current assets of $67,000, and total current liabilities of S23,450. The company reported annual sales of $300,000 in the most recent annual report. Over the past year, how often did Crockett Electronics sell and replace its inventory? 16.42% 14.93x 2.86% 8.01x The inventory turnover ratio across companies in the electronics industry is 12.6905x. Based on this information, which of the following statements is true for Crockett Electronics? Crockett Electronics is holding more inventory per dollar of sales compared with the industry average. Crockett Electronics is holding less inventory per dollar of sales compared with 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 each. 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 coming 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.)

Answer 1

Crockket Electronics:

Current Assets= $67,000. Cash= $30,150. Accounts Receivable= $16,750

Hence Inventory= $67,000 - $30,150 - $16,750 = $20,100

Total sales= $300,000.

Therefore, inventory turnover= Sales/Inventory = $300,000/$20,100 = 14.93 times.

The answer is second of the options given.

Industry average of inventory turnover ratio is 12.6905x. That means Crockket Electronics is holding less inventory per dollar of sales compared with the industry average. The answer is second of the options given

Regarding the Electronics toys industry:

1. Our Play has 20.805 days of sales tied up in receivables which is more than industry average. It takes Our Play more time to collect cash from customers than it takes Like Games.
2. Like Games Fixed Assets Turn over Ratio is higher than that of Our Play. This is because Like Games was formed …..   Assuming that Fixed Assets Prices (not book value) rose over past 6 years due to inflation, Our Play paid a higher amount for its fixed assets.
3. Average total Sales turn over in the industry is 1.0870 which means that 1.0870 times sales is being generated with every Dollar of investment in assets. A higher total assets turnover indicates greater efficiency. Both companies’ total assets turnover ratios are lower than the industry average.

Details of calculations are appended below:

C D E 1 Like Game Our Play Industry 2 Sales 300000 300000 765000 3 Accounts receivable 8100 17100 11550 4 Net Fixed assets 165000 240000 650250 5 Total assets 285000 375000 703800 6 Days sales in receivable Receivable/(Sales/365) 9.8550 20.8050 5.5108 7 Fixed assets turnover ratio =Sales/Net Fxed assets 1.8182 1.2500 1.1765 8 Total assets turnover ratio =Sales/Total assets 1.0526 0.8000 1.0870 o