Question:
Show the calculation of the following activity ratios: (1) the receivables turnover ratio, (2) the inventory
turnover ratio, and (3) the asset turnover ratio. What information about a company do these ratios offer?
Answer:
Receivables turnover ratio = Net sales
Average accounts receivable (net)
Inventory turnover ratio = Cost of goods sold
Average inventory
Asset turnover ratio = Net sales
Average total assets
Activity ratios are designed to provide information about a company’s effectiveness in managing
assets. Activity or turnover of certain assets measures the frequency with which those assets are replaced.
The greater the number of times an asset turns over, the less cash a company must devote to that asset,
and the more cash it can commit to other purposes.
Show the calculation of the following activity ratios: (1) the receivables turnover ratio, (2) the inventory
turnover ratio, and (3) the asset turnover ratio. What information about a company do these ratios offer?
Answer:
Receivables turnover ratio = Net sales
Average accounts receivable (net)
Inventory turnover ratio = Cost of goods sold
Average inventory
Asset turnover ratio = Net sales
Average total assets
Activity ratios are designed to provide information about a company’s effectiveness in managing
assets. Activity or turnover of certain assets measures the frequency with which those assets are replaced.
The greater the number of times an asset turns over, the less cash a company must devote to that asset,
and the more cash it can commit to other purposes.
