Question

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: Graham Pharmaceuticals has a quick ratio of 2.00x, $31, 500 in cash, $17, 500 in accounts receivable, some assets of inventory, total $70,000, and total abilities of $24, 500. The company reported annual sales of $100,000 in the most recent annual report, over the past year, how often did Graham Pharmaceuticals sell and replace its inventory? a. 8.01 x.b. 5.24 x.c. 2.85 x.d. 4.75 x.The inventory turnover ratio across companies in the pharmaceutical industry is 4.05x. Based on this information, which of the following statements is true for Graham Pharmaceuticals? A. Graham Pharmaceuticals is holding less inventory per dollar of sales compared to the industry average. B. Graham Pharmaceuticals is holding more inventory per dollar of sales compared to the industry average. You are analyzing two companies that manufacture electronic toy s-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 $100,000 each. You've collected company data to compare Like Games and our play. Last year the average companies in the coming year. You've collected data from the companies financial statements. This information is listed as follows:Using this information, complete the following statements to include in your analysis. Data collected (in dollars) Like Games Our Play Industary AverageAccounts receivable 2,700 3,900 3,850Net fixed assets 55,000 80,000 216,750Total assets 95,000 125,000 234,6001. A ____ days of sales outstanding represents an efficient credit and collection policy. between the two companies ____ is collecting cash from its customers faster than ____ but both companies are collecting their receivables less quickly than the industry average. 2. Our Play's fixed assets turnover ratio is ___ than that of Like Games. This could be because our play is relatively new company, so the acquisition cost of its fixed assets is ____ than the recorded cost of Like Games's fixed assets. 3. Like Games's total assets turnover ratio is ____ which is ___ than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Answer 1

Answer:

Asset Management Ratios

Part A:

1. Inventory turnover:

= d. 4.75 x

2. Based on this information, the true statement for Graham Pharmaceuticals is:

B. Graham Pharmaceuticals is holding more inventory per dollar of sales compared to the industry average.

Part B:

1. A __Average__ 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 relatively new company, so the acquisition cost of its fixed assets is _higher___ than the recorded cost of Like Games's fixed assets.

3. Like Games's total assets turnover ratio is _1.05x_ which is _higher_ than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Explanation:

a) Data and Calculations:

Graham Pharmaceuticals

Quick ratio = 2.00x

Cash = $31,500

Accounts receivable = $17,500

Inventory = x

Total current assets = $70,000

Total current liabilities = $24,500

Quick assets = $24,500 * 2 = $49,000 ($31,500 + $17,500)

Inventory (x) = $21,000 ($70,000 - $49,000)

Annual sales = $100,000

Inventory Turnover = $100,000/$21,000 = 4.76x

Part B:

                                      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

Sales revenue                   100,000     100,000     100,000

Days Sales Outstanding      9.9 days   14.2 days      14x

Accounts receivable turnover 37x       25.6x          26x

Average Collection Period    9.9 days   14.3 days    14x

Fixed assets turnover ratio  1.82x        1.25x          0.46x

Total assets turnover ratio   1.05x        0.8x           0.43x

Average days of sales outstanding = Average Accounts Receivable/Sales * 365

Accounts receivable turnover = Net Sales/Average Receivable

Average Collection Period = 365/Accounts receivable turnover

Fixed assets turnover ratio = Net Sales/Net Fixed Assets

Total assets turnover ratio = Net Sales/Total assets