You are analyzing two companies that manufacture electronic toys Like Games Inc.
ID: 2813371 • Letter: Y
Question
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 collected company data to compare Like Games and Our Play. Last year, the average sales for all 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. A collecting cash from its customers faster than average 2. Our Play's fixed assets turnover ratio is the acquisition cost of its fixed assets is 3. Like Games's total assets turnover ratio is days of sales outstanding represents an efficient credit and collection policy. Between the two companies is , but both companies are collecting their receivables less quickly than the industry than that of Like Games. This could be because Our Play is a relatively new com than the recorded cost of Like Games's net fixed assets. pany, so general, a higher total assets turnover ratio indicates greater efficiency which is than the industry's average total assets turnover ratio. InExplanation / Answer
Answer 1) Days of sales outstanding measures a compay's collection efficiency.A high days of sales outstanding means company is taking a long time to collect from its customer, while a low days of sales outstanding means company is collecting quicker. So a low days of sales outstanding represents an efficient credit & collection policy.
Collection period can be calculated by using the following formula -
(Accounts receivable / Credit sales) X No. of days a year
Calculation of collection period of Like games Inc. and Our play Inc.(assuming all the sales are in credit and 360 days a year) :-
Like Games Inc.- ($13500/$500000)X360 = 9.72 days.
Our Play Inc. - ($19500/$500000)X360 =14.04 days.
So, between the two companies, Like Games Inc. is collecting cash from its customers faster than Our Play Inc.
Answer 2) Fixed assets trunover ratio = Net Sales / Net fixed assets
Like Games Inc. = $500000/$275000 = 1.82
Our Play Inc. = $500000/400000 = 1.25
So, Our Play's fixed assets turnover is Lower than that of Like Games. The acquisition cost of its fixed assets is Higher than the recorded cost of Like Games's net fixed assets.
Answer 3) Total Assers trunover ratio = Net Sales / Average total assets
Like Game Inc. = $500000/$475000 = 1.05
Industry average = $1275000/$1173000 = 1.09
So, Like Games's total assets trunover ratio is 1.05, which is lower than the industry's average total assets turnover ratio.
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