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Q: finance management ( Answered 5 out of 5 stars,   0 Comments )
Question  
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
Answer  
Subject: Re: finance management
Answered By: elmarto-ga on 12 May 2005 20:09 PDT
Rated:5 out of 5 stars
 
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:5 out of 5 stars
EXCELLENT-- Thanks so much for your quick response

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