Answer To Accounting Question IFS Test No 1 On Interpretation of Financial Statements

November 7th, 2006 Comments off
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Answer to Accounting Test Question IFS No 1:

Inventory turnover ratio

=  Cost of Goods Sold/ Average Inventory Value

= $3,000,000/(830,000+710,000)/2

=$3,000,000/$770,000

= 3.89 times

Receivables turnover ratio

= Net Turnover/(Average Accounts Receivable)

=$7,000,000/($810,000+620,000)/2

= 9.79 times

Therefore,

Average collection period

=365 days/ 9.79

=37.28 days

Asset turnover ratio

= Net Turnover/ (Average Total Asset)

=$7,000,000/($4,430,000+3,990,000)/2

=1.66 times

Comparison of Company XYZ vs Industry Average

Asset Management Ratio

Company XYZ

Industry Avg

Inventory turnover ratio ( times)

3.89x

5x

Average collection period (days)

37.28 days

45 days

Asset turnover ratio  (times)

1.66x

2 x

Tabulate above the efficiency of Company XYZ’s efficiency in asset management.

Company XYZ turns its inventory over 3.9 times per year compared to the industry average of 5 times per year. Its asset turnover ratio is also slightly better than the industry average (1.66 times per year versus 2 times).

These ratios indicated that Company XYZ is able to generate sales per dollar invested in inventory and in total assets than the industry averages.

Also, Company XYZ is able to collect its receivables quicker than the industry average ( 37.28 days compared to industry average of 45 days)

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Financial Accounting

 
 

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