Reference no: EM13971416

Asset management ratios

Asset management ratios are used to measure how effectively a firm manages its assets.

Remember, there are two slightly different equations that can be used to evaluate the management of a firm's inventory. In either case, the inventory management ratio puts the inventory balance in the denominator and either its corresponding Sales value or the corresponding Cost of Goods Sold (COGS) value in the numerator. In the first (older) sales-based computation, the ratio identifies the number of sales dollars generated with each dollar of inventory held. The second, newer equation-which places COGS in the numerator-compares the costs of producing the firm's goods with the amount of inventory held. Don't forget that the components of COGS are direct materials, direct labor, and the overhead associated with producing the firm's goods and services. Therefore, the COGS-based version of the ratio compares the firm's inventory with its costs, whereas the Sales-based version compares the inventory balance with the firm's revenues and profits.

Now, consider the following case:

General Forge and Foundry Co. has a quick ratio of 2.00x, $34,875 in cash, $19,375 in accounts receivable, some inventory, total current assets of $77,500, and total current liabilities of $27,125. The company reported annual sales and cost of goods sold of $800,000 and $560,000, respectively, in the most recent annual report.

Over the past year, General Forge and Foundry Co. sold and replace its inventory...(0.35x or 65.38x or 34.41x or 37.85x) ............   times this year (using the sales-based inventory turnover ratio) and.(43.36x or 24.09x or 33.73x or 21.20x) ...................    times per year (using the COGS-based ratio).

The sales-based inventory turnover ratio across companies in the industry is 29.25x. Based on this information, which of the following statements istrue for General Forge and Foundry Co.?

(a) General Forge and Foundry Co. is holding more inventory per dollar of sales compared to the industry average.

(b) General Forge and Foundry Co. 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 $800,000 each. You've gathered up company data to compare Like Games and Our Play. Last year, the average sales for industry competitors was $2,040,000. 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	21,600	31,200	23,000
Net fixed assets	440,000	640,000	1,734,000
Total assets	760,000	1,000,000	1,876,800

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

1. Our Play has....(14.24 or 9.86).............   days of sales tied up in receivables, which is much....(higher or lower)...............   than the industry average. It takes Our Play.........(less or more).........   time to collect cash from its customers than it takes Like Games.

2. Like Games's fixed assets turnover ratio is (higher or lower)..............   than that of Our Play. This is because Like Games was formed eight years ago, so the acquisition cost of its fixed assets is recorded at historic values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a..(higher or lower)..............   amount for its fixed assets.

3. The average total assets turnover in the electronic toys industry is 1.09x, which means that $1.09 of sales is being generated with every dollar of investment in assets. A ..(higher or lower)......  total assets turnover ratio indicates greater efficiency. Both companies' total assets turnover ratios are...(higher or lower)......   than the industry average.