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Q: Finance ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Finance
Category: Business and Money > Finance
Asked by: tra5489-ga
List Price: $30.00
Posted: 01 Apr 2005 22:44 PST
Expires: 01 May 2005 23:44 PDT
Question ID: 503952
Use the following annual information to answer the three questions that follow:

ABC Fitness Company
 000?s
 
INCOME STATEMENT
 Dec. 99
 
Sales
 1968.016
 
Cost of Goods Sold
 1466.733
 
Gross Profit
 501.283
 
Selling and Ad. Expenses
 361.402
 
Depreciation
 35.7
 
Operating Income (EBIT)
 104.181
 
Interest Expense
 34.482
 
Other Expense
 14.124
 
EBT
 83.823
 
Taxes
 24.701
 
Net Income
 59.122
 
BALANCE SHEET
 000?s
 
Assets
  
 
Cash
 89.469
 
Net Receivables
 55.514
 
Inventories
 322.433
 
Prepaids
 8.775
 
Total Current Assets
 476.191
 
Gross Plant & Equipment
 955.661
 
Accumulated Dep
 338.513
 
Net Plant & Equip
 617.148
 
Other Assets
 24.621
 
Total Assets
 1117.96
 
Liabilities
  
 
Notes Payable
 1.127
 
Accounts Payable
 144.638
 
Taxes Payable
 16.797
 
Accrued Expense
 98.233
 
Total Current Liabilities
 260.795
 
Long-Term Debt
 415.138
 
Deferred Taxes
 20.396
 
Total Liabilities
 696.329
 
Equity
  
 
Common Stock
 0.32
 
Capital Surplus
 242.843
 
Retained Earnings
 178.468
 
Total Equity
 421.631
 
Total Liabilities and Equity
 1117.96
 

Calculate the following asset activity ratios for the end of 1999.

Average Collection Period 

Inventory Turnover 

Total Asset Turnover 

Please show calculations
Answer  
Subject: Re: Finance
Answered By: elmarto-ga on 02 Apr 2005 12:29 PST
Rated:5 out of 5 stars
 
Hi tra5489!
Here are the definitions, formulae and calculations of the ratios you require.


* Average Collection Period

"The average collection period is the number of days required, on
average, to collect the amounts owed to the company by its customers"

How to keep score in business
http://www.alpineguild.com/how_to_keep_score_in_business.htm

"...The accounts receivable period is a measure of a company?s ability
to collect accounts receivable within a timely and reasonable period.
The accounts collection period varies from industry to industry. The
smaller the accounts receivable period, the more effectively a company
is in managing and collecting money from customers."

Financial Ratios
http://www.activemedia-guide.com/print_bused_finrat.htm

The formula for this ratio is:

ACP = Accounts Receivable / (Sales / 360 days)
(different sources sometimes use 365 days instead of 360, but the
final value for this ratio is not very different)

In your case, we have the the Accounts Receivable is 55.514, and
annual sales are 1968.016. Therefore, the ACP becomes:

ACP = 55.514 / (1968.016/360)
ACP = 55.514 / 5.4667
ACP = 10.15

The average collection period during 1999 was then 10.15 days.


* Inventory turnover

"The inventory turnover ratio measures the number of times during a
year that a company replaces its inventory. The turnover is only
meaningful when comparing other firms in the industry or a company?s
prior inventory turnover. Differences in turnover rates result from
differing operating characteristics within an industry...

"The higher the inventory turnover rate means the more efficiently a
company is able to grow sales volume"

Financial Ratios
http://www.activemedia-guide.com/print_bused_finrat.htm

The formula for the inventory turnover ratio is the following:

IT = (Cost of Goods Sold) / (Total Inventory)

In your case, the cost of goods sold during 1999 was 1466.733, while
the inventory was 322.433. Therefore,

IT = 1466.733 / 322.433 = 4.54 times

This means that the company fully replaced its inventory approximately
4.54 times during 1999.


* Total Asset Turnover

"The total asset turnover is a measure of how efficiently and
effectively a company uses its assets to generate sales... The higher
the total asset turnover ratio, the more efficiently a firms assets
have been used"

Financial Ratios
http://www.activemedia-guide.com/print_bused_finrat.htm

The formula for this ratio is:

Total Asset Turnover = Sales / Total Assets

In your case, Sales during 1999 were 1968.016, while Total Assets were
1117.96. Therefore,

Total Asset Turnover = 1968.016 / 1117.96 = 1.76

The total asset turnover for 1999 was 1.76, meaning that each $1 in
assets generated $1.76 in sales.


Google search terms
"average collection period" formula
://www.google.es/search?sourceid=navclient&hl=es&ie=UTF-8&rls=RNWE,RNWE:2004-53,RNWE:es&q=%22average+collection+period%22+formula
"inventory turnover" formula
://www.google.es/search?sourceid=navclient&hl=es&ie=UTF-8&rls=RNWE,RNWE:2004-53,RNWE:es&q=%22inventory+turnover%22+formula
"total asset turnover" formula
://www.google.es/search?sourceid=navclient&hl=es&ie=UTF-8&rls=RNWE,RNWE:2004-53,RNWE:es&q=%22total+asset+turnover%22+formula


I hope this helps! If you have any questions regarding my answer,
please don't hesitate to request a clarification. Otherwise I await
your rating and final comments.

Best wishes!
elmarto
tra5489-ga rated this answer:5 out of 5 stars

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