exam 2 review

Days in inventory - use

- Indicates the average number of days inventory is held. - high inventory turnover indicates the company has minimal funds tied up in inventory, that i has a minimal amount of inventory on hand at any one time. Can be efficient but may indicate the company is losing sales opportunities

Receivables turnover ratio- use

- Used to asses the liquidity of receivables. - measures the number of times on average a company collects receivables during the period. (how fast it can turn credit into cash)

Return on assets ratio - use

- an overall measure of profitability - indicates the amount of net income generated by each dollar of assets.

Asset turnover ratio - use

- indicates how efficiently a company uses its assets to generate sales - that is how many dollars of sales a company generates for each dollar invested in assets. - higher asset turnover ratio means a company is operating more efficiently (more sales per dollar in assets)

Profit margin ratio - use

- tells how effective a company is in turning its sales into income- that is how much income each dollar of sales provides.

Company increases its return on assets by:

1) increasing the margin it generates from each dollar of goods that it sells (profit margin ratio) 2) increasing the volume of goods that it sells (Asset turnover)

Inventory turnover ratio- formula

Cost of Goods Sold / Average Inventory = _._ times

Average collection period - use

Measures the average amount of time that a receivable is outstanding, average collection period should not greatly exceed the credit term period.

Receivables turnover ratio- formula

Net credit sales / Average net receivables = _._ times

Return on assets ratio- formula

Net income / Average total assets

Profit margin ratio - formula

Net income / Net sales = _%

Asset turnover ratio - formula

Net sales / average total assets = _._ times

Days in inventory - formula

365 / Inventory Turnover ratio

Average collection period- formula

365/ receivables turnover ratio = _ days

Inventory turnover ratio- use

indicates how quickly a company sells its good- the number of times the average inventory "turns over" during the year.