Question

Explain what the following ratios measure.

a. Asset turnover (2 marks)

b. Inventory turnover (2 marks)

c. Operating cycle (2 marks)

d. Cash conversion cycle (2 marks)

e. Customer collection period (2 marks)

Answer 1

a) Asset turnover ratio = Annual Sales Total / [(Assets at start of the year + Assets at end of the year)/2]

This ratio indicates the effieciency at which the company is using its assets during the year to generate revenue.

b) Inventory turnover ratio = It is also an efficiency ratio.

= Sales / [(beginning Inventory + Ending Inventory)/2]

It indiactes how many times Inventory has been sold and replaced during the period.

c) Operating cycle.

It is the time by which the cash put into a specific operating activity is earned as a return by the company from that operating activity itself.

d) Cash conversion cycle.

The cash conversion cycle is the time from paying suppliers for materials to collecting the cash from the sale of goods produced from these materials.

e) Customer collection period

The customer collection period is the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable.