3. 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 period (also called thedays 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 of $25,550. The company reported annual sales of $100,000 in the most recent annual report. Additionally, the company's cost of goods sold is 75% of sales.

Over the past year, how often did Polk Software Inc. sell and replace its inventory?

2.86x

8.01x

3.76x

3.42x

The inventory turnover ratio across companies in the software industry is 3.762x. Based on this information, which of the following statements istruefor Polk Software Inc.?

Polk Software Inc. is holding more inventory per dollar of sales compared with the industry average.

Polk Software Inc. is holding less 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.)

Data Collected (in dollars)

Like Games

Our Play

Industry Average

Accounts receivable

2,700

3,900

3,850

Net fixed assets

55,000

80,000

216,750

Total assets

95,000

125,000

234,600

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

1.

A (low/high)days of sales outstanding represents an efficient credit and collection policy. Between the two companies, (Like Games/Our Play)is collecting cash from its customers faster than (Our Play/Like Games), but both companies are collecting their receivables less quickly than the industry average.

2.

Our Play's fixed assets turnover ratio is (Higher/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/lower)than the recorded cost of Like Games's net fixed assets.

3.

Like Games's total assets turnover ratio is (1.05x, 0.80x), which is (Higher/lower)than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Over the past year, howI olten did Polk Software Inc. sell and replace its inventory? 0 2.86}: O 8.013: O 336}: O 3.42x The inventory turnover ratio across companies in the soltware industry is 3.?62x. Based on this infonnaljon, which of the following statements is true for Polk Software Inc.? C) Polk Software Inc. is holding more inventory per dollar of sales compared with the industry average. O Polk Sozware Inc. is holding less inventory per dollar of sales compared with the industry average. You are analyzing two companies that manufacture electronic toyslike Games Inc. and Our Play Inc. lJ'I-ce 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 Uke Games and Our Play. Last year, the average sales for all industry competitors was $255,000. its 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' nancial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Data Collected (in dollars) Lilre Games Our Play Industry Average Acoounts receivable 2,?00 3,900 3,350 Net xed assets 55,000 80,000 216,?50 Total assets 95,000 125,000 234,600