Question

2. 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 pericod (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: Polk Software Inc. has a quick ratio of 2.00x, $32,850 in cash, $18,250 in accounts receivable, some inventory, total current assets of $73,000, and total current liabilities $25,550. The company reported annual sales of $100,000 in the most recent annual report. Over the past year, how often did Polk Software Inc. sell and replace its inventory? O 2.86x O 8.01x O 4.57x O 5.03x The inventory turnover ratio across companies in the software industry is 5.027x. Based on this information, which of the following statements is true for Polk Software Inc.? O Polk Software Inc. is holding less inventory per dollar of sales compared with the industry average. O Polk Software Inc. is holding more inventory per dollar of sales compared with 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 $100,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all 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: (Note: Assume there are 365 days in a year.)

Answer 1

For, Polk software, given data

Sales = $100000

cash = $32850

Account receivable = $18250

Current Assets = $73000

So, Inventory = Current Assets - Cash - Account receivable = 73000-32850-18250 = $21000

a). Inventory turn over ratio = Sales/ Inventory = 100000/21000 = 4.57times

b). As, Polk software's Inventory turnover ratio is lower than industry average, they are holding more inventory per dollar of sales with compared to industry.

Question 2).

Data available

	Like Games	Our Play	Industry Average
Sales	$ 1,00,000.00	$ 1,00,000.00	$         2,55,000.00
Account receivable	$       2,700.00	$       3,900.00	$               3,850.00
Net fixed assets	$     55,000.00	$     80,000.00	$         2,16,750.00
Total Assets	$     95,000.00	$ 1,25,000.00	$         2,34,600.00
Days sales outstanding	9.86	14.24	5.51
Fixed asset turnover ratio	1.82	1.25	1.18
total asset turnover ratio	1.05	0.80	1.09

Following formulas were used:

Days sales outstanding = Account receivable*365/sales

Fixed asset turnover ratio = Sales/Net Fixed Assets

Total asset turnover ratio = Sales/Total Assets

1. A 5.51 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 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.

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