Question

CENGAGE MINDTAP Search this course Assignment 04 - Analysis of Financial Statements 0 X 3. Asset management ratios A Aa E 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: Franklin Aerospace has a quick ratio of 2.00x, $31,500 in cash, $17,500 in accounts receivable, some inventory, total current assets of $70,000, and total current liabilities of $24,500. The company reported annual sales of $200,000 in the most recent annual report. Over the past year, how often did Franklin Aerospace sell and replace its inventory? O 9.52 2.86 x 10.47 8.01 x O The inventory turnover ratio across companies in the aerospace Industry is 10.47%. Based on this information, which of the following statements is true for Franklin Aerospace? Franklin Aerospace is holding more inventory per dollar of sales compared to the industry average. Franklin Aerospace is holding less 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

Answer 1

Answer a.

Current assets = Cash + Accounts receivable + Inventory
$70,000 = $31,500 + $17,500 + Inventory
Inventory = $21,000

Inventory turnover = Sales / Inventory
Inventory turnover = $200,000 / $21,000
Inventory turnover = 9.52 x

Answer b.

Franklin Aerospace 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 * $5,400 / $200,000
Days of sales outstanding = 9.86 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $200,000 / $110,000
Fixed assets turnover = 1.82 times

Total assets turnover = Sales / Total assets
Total assets turnover = $200,000 / $190,000
Total assets turnover = 1.05 times

Our Play:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $7,800 / $200,000
Days of sales outstanding = 14.24 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $200,000 / $160,000
Fixed assets turnover = 1.25 times

Total assets turnover = Sales / Total assets
Total assets turnover = $200,000 / $250,000
Total assets turnover = 0.80 times

Industry Average:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $7,700 / $510,000
Days of sales outstanding = 5.51 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $510,000 / $433,500
Fixed assets turnover = 1.18 times

Total assets turnover = Sales / Total assets
Total assets turnover = $510,000 / $469,200
Total assets turnover = 1.09 times

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

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

Like Games’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.