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Chapter 2: 21BP_c (page 81)

Indicate if there is an improvement or decline in total asset turnover, and based on the other ratios, indicate why this development has taken place.

Short Answer

Expert verified

There is a decline in total assets turnover from 2.43 to 2.15. This development has taken place because of the slowdown in the inventory turnover ratio (11.73% to 5.40%). The other two ratios (i.e. account receivable turnover ratio and fixed assets turnover ratio) are slightly improved.

Step by step solution

01

Comparison of Total asset turnover ratio

20X1

20X2

Total asset turnover ratio

2.43

2.15

Assetturnover=NetsalesTotalassets

The total assets turnover ratio of the company has decreased in 20X2 in comparison to the Year 20X1 due to a less increase in sales in comparison to total assets.

02

Comparison of Inventory turnover 

20X1

20X2

Inventory turnover ratio

11.73%

5.40%

The Inventory turnover ratio of the company has also decreased in 20X2 in comparison to 20X1 due to less increase in sales in comparison to inventory.

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Most popular questions from this chapter

Network Communications has total assets of \(1,500,000 and current assets of \)612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its return on sales is 8 percent. What is its return on stockholders鈥� equity?

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder鈥檚 equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder鈥檚 equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.

Perez Corporation has the following financial data for the years 20X1 and 20X2:

20X1

20X2

Sales

\(8,000,000

\)10,000,000

Cost of goods sold

6,000,000

9,000,000

Inventory

800,000

1,000,000

a. Compute inventory turnover based on Ratio 6, Sales/Inventory, for each year.

Jerry Rice and Grain Stores has \(4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has \)123,000 in current liabilities and $349,000 in long-term liabilities.

a. What is its return on stockholders鈥� equity?

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

a. The interest coverage.

Times mirror and glass company

Sales

\(126,000

Less: Cost of goods sold

93,000

Gross profit

\)33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\(18,000

Less: Interest expenses

3,000

Earning before taxes

\)15,000

Less: Taxes (30%)

4,500

Earning after taxes

$10,500

*equal income before interest and taxes
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