At December 31, 2017 and 2016, respectively, Tyler Industries reported land, bui

Question

At December 31, 2017 and 2016, respectively, Tyler Industries reported land, buildings, and equipment totaling $5,655,000 and $2,152,000 along with Accumulated Depreciation of $1,000,000 and $600,000 on its balance sheets. Revenues amounted to $38,227,000 and $12,113,000 for 2017 and 2016, respectively.

1) Compute Tyler's fixed asset turnover ratio for the year ended December 31, 2017 (please show work)

2) Does a declining ratio always indicate a negative trend? (I said no but not sure. My reasoning was it depends on the industry and things that can lower the ratio are making large investment(s) that have not yet generated revenue and/or investing in areas that do not increase the capacity of the operation).

Explanation / Answer

Fixed asset turover ratio =( Net annual sales )/ average net fixed assets

Net assets                        = cost - Accumulated depreciation

2017                                 = 5,655,000 - 1,000,000 = $4,655,000

2016                                = $2,152,000 - 600,000 = $1,552,000

Average                        =( $4,655,000 + 1,552,000)/ 2 = $3,103,500

Ratio                                  = $38,227,000/ 4,655,000

                                          = 12.32

(b) Declining ratio does not always indicate a negative trend for if a company is investing in fixed assets over time or is replacing old ones with new ones it will increase the base thus leading to decline in ratio.

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