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.