Question

9. Asset management ratios Which of the following is not an asset management ratio? The average collection period O A days sales outstanding ratio O A price-earnings ratio A inventory turnover ratio Johnny Appleseed Brewing Company (JABC) has a quick ratio of 2.00; $38,250 in cash; $21,250 in accounts receivable; some inventory; total current assets of $85,000; and total current liabilities of $29,750. In its most recent annual report, JABC reported annual sales of $100,000 and a cost of goods sold equal to 65% of annual sales. How many times is Johnny Appleseed Brewing Company (JABC) selling and replacing its inventory? O 3.92x O 0.35x O 2.805x O 2.55x

1. options for a: high or low

options for b:BrainGames Inc. or IntelliGames Inc.

options for c:BrainGames Inc. or IntelliGames Inc

2. options for a:lower or higher

options for b:lower or greater

3. options for a: 0.80 or 1.05x

options for b: higher or lower

Answer 1

Answer a.

A price-earnings ratio is not an asset management ratio.

Answer b.

Current assets = Cash + Accounts receivable + Inventory
$85,000 = $38,250 + $21,250 + Inventory
Inventory = $25,500

Cost of Goods Sold = Sales * 65%
Cost of Goods Sold = $100,000 * 65%
Cost of Goods Sold = $65,000

Inventory turnover = Cost of Goods Sold / Inventory
Inventory turnover = $65,000 / $25,500
Inventory turnover = 2.55 x

Answer c.

JABC is holding less inventory per dollar of COGS compared to the industry average.

Answer d.

IntelliGames Inc.:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $2,700 / $100,000
Days of sales outstanding = 9.86 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $100,000 / $55,000
Fixed assets turnover = 1.82 times

Total assets turnover = Sales / Total assets
Total assets turnover = $100,000 / $95,000
Total assets turnover = 1.05 times

BrainGames Inc.:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $3,900 / $100,000
Days of sales outstanding = 14.24 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $100,000 / $80,000
Fixed assets turnover = 1.25 times

Total assets turnover = Sales / Total assets
Total assets turnover = $100,000 / $125,000
Total assets turnover = 0.80 times

Industry Average:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $2,875 / $255,000
Days of sales outstanding = 4.12 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $255,000 / $216,750
Fixed assets turnover = 1.18 times

Total assets turnover = Sales / Total assets
Total assets turnover = $255,000 / $234,600
Total assets turnover = 1.09 times

A low days sales outstanding represents an efficient credit and collection policy. Between the two companies, IntellGames Inc. is collecting cash from its customers faster than BrainGames Inc., but both companies are collecting their receivables less quickly than the industry average.

BrainGames’s fixed-asset turnover ratio is lower than that of IntelliGames. This could be because BrainGames is a relatively new company, so the acquisition costs of its fixed assets is higher than the recorded cost of IntelliGames’s net fixed assets.

IntelliGames’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.