Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate colectible accounts receivable or obsolete inventory or equipment Total are turnover measures the company's effectiveness in tizing its total assets and is calculated by dividing total assets into sales Tutal assets 1. Total asset turnover for SciTronics in 2008 can be calculated by dividing The tumor improvedeteriorated from times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait on average between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Cyngowe For the exclusive use of M. Turay, 2020. Then, divide the accounts receivable by the average credit sales per day to determine the number of days of sales that are still unpaid: Accounts receivable Credit sales per day 2 SciTronics had invested in accounts receivables a year-end 2008. IS average sales per day were during 2008 and is verage collection period was days. This represented an improvement deterioration from the average collection period of days in 2005 A third activity ratio is the inventory tumover ratio, which indicates the effectiveness with which the company is employing inventory. Since inventory is recorded on the balance sheet at cont notat its sales value), it is advisable to use cost of goods sold as the measure of activity. The inventory tumover figure is calculated by dividing cost of goods sold by inventory Cost of goods sold Inventory 3. SciTronics apparently needed s___ of inventory at year-end 2005 to support its operation during 2008. Its activity during 2005 as measured by the cost of goods sold was $It therefore had an inventory turnover of times. This represented an improvement deterioration from times in 2005 An alternative measure of inventory management is days of inventory, which can be calculated by dividing the cost of goods sold by 25 days to determine the average cost of goods sold per day. Days of inventory is calculated by dividing the total inventory by the cost of goods sold per day A fourth and final activity ratio is the fixed asset tumover ratio, which measures the effectiveness of the company in utilizing its plant & equipment: Net sales Netfied assets 4. SciTronics had net fixed assets of and sales of in 2005. Is fined asset tumover ratio in 2008 was times, an improvementeration from times in 2005 Sales Growth pg-6 1. Scitronics profit as a percentage of sales in 2008 was 5.74% 2. This represented an increase/decrease from 3.4% in 2005 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate colectible accounts receivable or obsolete inventory or equipment Total are turnover measures the company's effectiveness in tizing its total assets and is calculated by dividing total assets into sales Tutal assets 1. Total asset turnover for SciTronics in 2008 can be calculated by dividing The tumor improvedeteriorated from times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait on average between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Cyngowe For the exclusive use of M. Turay, 2020. Then, divide the accounts receivable by the average credit sales per day to determine the number of days of sales that are still unpaid: Accounts receivable Credit sales per day 2 SciTronics had invested in accounts receivables a year-end 2008. IS average sales per day were during 2008 and is verage collection period was days. This represented an improvement deterioration from the average collection period of days in 2005 A third activity ratio is the inventory tumover ratio, which indicates the effectiveness with which the company is employing inventory. Since inventory is recorded on the balance sheet at cont notat its sales value), it is advisable to use cost of goods sold as the measure of activity. The inventory tumover figure is calculated by dividing cost of goods sold by inventory Cost of goods sold Inventory 3. SciTronics apparently needed s___ of inventory at year-end 2005 to support its operation during 2008. Its activity during 2005 as measured by the cost of goods sold was $It therefore had an inventory turnover of times. This represented an improvement deterioration from times in 2005 An alternative measure of inventory management is days of inventory, which can be calculated by dividing the cost of goods sold by 25 days to determine the average cost of goods sold per day. Days of inventory is calculated by dividing the total inventory by the cost of goods sold per day A fourth and final activity ratio is the fixed asset tumover ratio, which measures the effectiveness of the company in utilizing its plant & equipment: Net sales Netfied assets 4. SciTronics had net fixed assets of and sales of in 2005. Is fined asset tumover ratio in 2008 was times, an improvementeration from times in 2005 Sales Growth pg-6 1. Scitronics profit as a percentage of sales in 2008 was 5.74% 2. This represented an increase/decrease from 3.4% in 2005