Question

3. 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: Franklin Aerospace has a quick ratio of 2.00, $26,775 in cash, $14,875 in accounts receivable, some inventory, total current assets of $59,500, and total current liabilities of $20,825. The company reported annual sales of $600,000, and cost of goods sold equal to 75% of sales in the most recent annual report. Over the past year, how often did Franklin Aerospace sell and replace its inventory? 27.73 times 25.21 times O 2.86 times O 33.61 times The inventory turnover ratio across companies in the aerospace industry is 21.43. 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 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 $600,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $1,530,000. 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:

Answer 1

Question 1

Current Assets = Cash + Accounts Receivable + Inventory

$59,500 = $26,775 + $14,875 + Inventory

=> Inventory = $17,850

Inevntory turnover = COGS/Inventory = (75% * 600,000)/17,850 = 25.21

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Inventory turnover ratio fo Franklin Aerospace is higher than industry average. This implies franklin is holding MORE inventory per dollar of sales compared to industry average.

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Days Sales outstanding = (Accounts Receivable/Total Credit Sales) * Number of days

Fixed assets turnover ratio = (Sales/Fixed Assets)

Total assets turnover ratio = (Sales/Total Assets)

1) A lower DSO 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............................

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

3) Like Game's total asset turnover ratio is 1.05, which is lower than the .........................................