Question

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 cost of goods sold of $100,000 in the most recent annual report. Over the past year, how often did Polk Software Inc. sell and replace its inventory? 8.01 x 05.03 x 4.57 x 2.86 x The inventory turnover ratio across companies in the software industry is 5.03x. Based on this information, which of the following statements is true for Polk Software Inc.? O Polk Software Inc. is holding more inventory per dollar of sales compared to the industry average. O Polk Software Inc. is holding less inventory per dollar of sales compared to the industry average.

Answer 1

Solution 1

The correct answer is c) 4.57

For Polk Software given data

Sales = $100,000

Cash= $ 32,850

Account receivable = $18250

Current Assets = $73000

So, Inventory = Current Assets - Cash - Account receivable = 73000-32850-18250 = $21000

a). Inventory turn over ratio = Sales/ Inventory = 100,000/21,000 = 4.57times

b). As, Polk software's Inventory turnover ratio is lower than industry average, they are holding more inventory per dollar of sales with compared to industry.

Solution 2

Like Games Our Play Industry Average

Days sales outstanding 9.86 14.24 5.51

Fixed Assets Turnover Ratio 1.82 1.25 1.18

Total Assets Turnover Ratio 1.05 0.80 1.09

Following formulas were used:

Days sales outstanding = Account receivable*365/sales

Fixed asset turnover ratio = Sales/Net Fixed Assets

Total asset turnover ratio = Sales/Total Assets

1. A 5.51 days of sales outstanding represents an efficient credit and collection policy. Between the two companies, Like Games is collecting cash from its customers faster than Our Play, but both companies are collecting their receivables less quickly than the industry average.

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

3. Like Games's total assets turnover ratio is 1.05, which is lower than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.