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 Subject: finance management Category: Business and Money > Finance Asked by: supermom40-ga List Price: \$60.00 Posted: 12 May 2005 18:16 PDT Expires: 11 Jun 2005 18:16 PDT Question ID: 521117
 ```Please answer asap or by 3pm EST on Friday May 13,2005. Use the annual information found below to answer these questions. Please show all work including formulas and calculations used to arrive at financial values. Calculate the following asset activity ratios for the end of 2005 1. Average Collection Period 2. Inventory Turnover 3. Total Asset Turnover ABC Fitness 000's Income Statement Dec-05 Sales 2004.016 Cost of Goods Sold 1446.733 Gross Profit 557.283 Selling and Ad Expenses 361.402 Depreciation 56.87 Operating Income (EBIT) 139.011 Interest expense 34.482 Other Expense 14.124 EBT 90.405 Taxes 24.701 Net Income 65.704 Balance Sheet Assets Cash 25.32 Net Receivables 55.514 Inventories 141.35 Prepaids 8.775 Total Current Assests 230.959 Gross Plant & Equipment 213.34 Accumulated Depreciation 161.7 Net Plant & Equipment 507.34 Other Assets 4.621 Total Assests 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```
 ```Hi supermom! Here are the ratios you need: 1. Average Collection Period Definition: "The average collection period measures the length of time it takes to convert your average sales into cash. This measurement defines the relationship between accounts receivable and your cash flow. A longer average collection period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying bills" Formula: Accounts Receivable / (Annual Sales/360) The definition and formula were taken from the following link, in which you can also find more information on this ratio, including some examples on how to use it: CCH Business Owner's Toolkit http://www.toolkit.cch.com/text/P06_4208.asp Using the values you provide: Accounts Receivable = \$55.514 Annual Sales = \$2004.016 Average Collection Period = 55.514 / (2004.016/360) = 9.97 days So, rounding, we conclude that the average collection period is 10 days. 2. Inventory Turnover Definition: "Every time we sell an amount of a product, product line, or other group of items equal to the average amount of money we have invested in those items, we have "turned" our inventory. The inventory turnover rate measures the number of times we have turned our inventory during the past 12 months." More information on how to interpret and use this ratio con be found at the following links: Investopedia http://www.investopedia.com/university/ratios/inventoryturnover.asp Underdstanding Inventory Turnover http://www.fool.com/foolu/askfoolu/2003/askfoolu030708.htm Formula: Cost of Goods Sold / Current Inventory So, using the values in the statement from ABC fitness: Cost of Goods Sold = \$1446.733 Current Inventory = \$141.35 Inventory Turnover ratio = 1446.733 / 141.35 = 10.23 ABC fitness has turned its inventory 10.23 times during 2005 Total Asset Turnover Definition: "The ratio of total sales (on your income statement) to total assets (on your balance sheet) indicates how well you're using all your business assets (rather than just inventories or fixed assets) to generate revenue. A high asset turnover ratio means a higher return on assets..." "The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. In its simplest terms, we are just saying that for every £1 of assets, the turnover is £x" CCH Business Owner's Toolkit http://www.toolkit.cch.com/text/P06_7195.asp Financial Ratio Analysis http://www.bized.ac.uk/compfact/ratios/asset3.htm Formula: Sales / Total Assets Using the values from ABC fitness: Sales = \$2004.016 Total Assets = \$1117.96 Total Asset Turnover = 2004.016 / 1117.96 = 1.79 Thus, for each \$1 in assets, ABC fitness generated \$1.79 in sales during 2005. Google search terms "average collection period" ://www.google.com.ar/search?hl=es&q=%22average+collection+period%22&meta= "inventory turnover" ://www.google.com.ar/search?hl=es&q=%22inventory+turnover%22&btnG=B%C3%BAsqueda&meta= "total asset turnover" ://www.google.com.ar/search?hl=es&q=%22total+asset+turnover%22&btnG=B%C3%BAsqueda&meta= 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```
 supermom40-ga rated this answer: `EXCELLENT-- Thanks so much for your quick response`