Asset management ratios are used to measure how effectively a firm manages its a

Question

Asset management ratios are used to measure how effectively a firm manages its assets. Consider the following case Payables for Quantech Inc. as of December 31, 2015, were $55 million. During that same period, annual operating costs (COGS) were $1,777.7 million. Based on this information, what would be the average payable period (APP) in days? O 12 days 11 days O 9 days O 7 days You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $500,000 each. You've gathered up company data to compare Like Games and Our Play. Last year, the average sales for industry competitors was $1,275,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows Data Collected (in dollars) Accounts receivable Net fixed assets Total assets Like Games 13,500 275,000 475,000 Our Play 19,500 400,000 625,000 Industry Average 19,250 1,083,750 1,173,000 Using this information, complete the following statements to include in your analysis. 1. Our Play has time to collect cash from its customers than it takes Like Games. days of sales tied up in receivables, which is much than the industry average. It takes our Play 2. Like Games's fixed assets turnover ratio is acquisition cost of its fixed assets is recorded at historical values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a assets than that of Our Play. This is because Like Games was formed eight years ago, so the mount for its fixed 3. The average total assets turnover in the electronic toys industry is 1.09x, which means that $1.09 of sales is being generated with every dollar of investment in assets. A are total assets turnover ratio indicates greater efficiency. Both companies' total assets turnover ratios than the industry average

Explanation / Answer

Average payable period = 365 / ( COGS / Accounts payable )

Average payable period = 365 / ( 1,777.7 / 55 ) = 365 / 32.32 = 11.3

Hence, 2nd option 11 days is the answer.

1. Average recievables period (Our Play) = 365 / ( Sales / Accounts recievables )

Average payable period = 365 / ( 50,000 / 19,500 ) = 365 / 2.56= 142.35 i.e. 142 days

Average recievables period (Industry) = 365 / ( Sales / Accounts recievables )

Average payable period = 365 / ( 1,275,000 / 19,250 ) = 365 / 66.23= 5.51 i.e. 6 days

Average recievables period (Like Games) = 365 / ( Sales / Accounts recievables )

Average payable period = 365 / ( 50,000 / 13,500 ) = 365 / 3.70= 98.55 i.e. 99 days

1. Our play has 142 days of sales tied up in recievables, which is much higher than the industry average. It takes our pay more time to collect cash from its customers than Like games.

2. Fixed asset turnover = Sales / Fixed assets

Like Games = 50,000 / 275,000 = 18.18%

Our Play = 50,000 / 400,000 = 12.50%

Like Gamers fixed assets turnover is higher than that of Our Play.

Our Play paid a higher price for its fixed assets.

3. Assets Turnover ratio = SAles / Total Assets

Like Games = 50,000 / 475,000 = 0.02%

Our Play = 50,000 / 625,000 = 0.08%

A higher total assets turnover ratio indicates greater efficiency.

Both company's total assets turnover ratio is lower than the industry average.

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