Question

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 relatively new company that has been operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. You’ve gathered up company data to compare Like Games and Our Play. Last year, the average sales for industry competitors was $255,000. 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:
Data Collected in Dollars

Like Games Our Play Industry Average

Accounts Receivable 2,700 3,900 3,850

Net Fixed Assets 55,000 80,000 216,750

Total Assets 95,000 125,000 234,600

Using this information, complete the following statements to include in your analysis.

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

Our Play’s fixed assets turnover ratio is (higher or 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 or lower) than the recorded cost of Like Games’s net fixed assets.

Like Games’s total assets turnover ratio is (0.80x or 1.05x), which is (higher or lower) than the industry’s average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Answer 1

Answer:

A LOW 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 that the industry average. (5.51 days)

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.

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

Explanation:

DSO

Like Game 365 / (100,000 / 2,700) = 9.855

Our Play    365 / (100,000 / 3,900) = 14.235

Average  365 / (255,000/3,850) = 5.510

Fixed assets turnover:

LG   100,000    /55,000  = 1.82

100,000 / 95,000 ) = 1.052

average 255,000 / 234,600 = 1.087

OP    80,000   /55,000  =   1.45

Avg 255,000 / 216,750 = 1.18