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Activity 8 RATIO ANALYSIS Asset Turnover Purpose: Understand the information provided by the asset turnover ratio. Identify the expected range and whether an increasing or decreasing trend is preferred. The asset turnover ratio compares net sales to total assets. This ratio evaluates how efficiently assets are used to produce net sales. It is one measure of sales volume. It is a measure of profitability. ASSET TURNOVER Net sales Average total assets 1. Average total assets = [(beginning assets + ending assets)/2). 12/31/98 assets are the ending assets of (1998/1999) and the beginning assets of (1998/1999). ($ in 000s) GAP INC GENERAL MOTORS (GM) HOME DEPOT ORACLE Net sales ye 1/30/99 $9.054,462 ve 12/31498 $161.315.000 fee 1/31299 $30.219.000 fy 5/31/99 $8.827.252 1/30/99 $3.963.919 Total assets 12/21/98 $257.389.000 1/31/99 $13.465.000 5/31/99 $7.259.654 1/30/08 Total assets $3.337.502 Source: Disclosure, Inc., Compact D/SEC, 2000. 12/31/97 $231.752.000 1/31/98 $11.229.000 5/31/98 $5.819.011 2. For each company listed above, compute the average total assets for the most recent fiscal year. Record your results below in 000s). Average total assets: $_3,650, 711. $ $ 3. For each company listed above, compute the asset turnover ratio. Record your results below. Asset turnover ratio: 2.48 4. The asset turnover ratios computed above are primarily in the range (less than 1/1 through 3 /more than 3). 5. The corporation with the strongest asset turnover ratio is (Gap Inc / GM/Home Depot / Oracle). 6. For the asset turnover ratio, an increasing / decreasing) trend is favorable and indicates effective use of assets to produce net sales. 7. Home Depot makes profits by generating a large volume of sales on items with low prices. The asset turnover ratio is one measure of sales volume. Therefore, the asset turnover ratio for Home Depot is expected to be relatively (high / low). 8. Fortune Magazine rated (Gap Inc / GM/Home Depot / Oracle) Number 1, indicating it is the largest corporation in the United States. Introduction Page 10