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Chapter 6

Chapter 6. Activity ratios. Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007. Indicates quality of receivables and how successful the firm is in its collections. Activity Ratios. Income Statement/ Balance Sheet Ratios.

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Chapter 6

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  1. Chapter 6 Activity ratios

  2. Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007 Indicates quality of receivables and how successful the firm is in its collections. Activity Ratios Income Statement/ Balance Sheet Ratios (Assume all sales are credit sales.) Activity Ratios $2,211 $394 = 5.61

  3. Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Activity Ratios Income Statement/ Balance Sheet Ratios Activity Ratios 365 5.61 = 65 days

  4. BW Industry 65.0 65.7 71.1 66.3 83.6 69.2 Year 2007 2006 2005 Activity Ratio Comparisons Average Collection Period BW has improved the average collection period to that of the industry average.

  5. Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Activity Ratios Income Statement/ Balance Sheet Ratios (Assume annual credit purchases = $1,551.) Activity Ratios $1551 $94 = 16.5

  6. PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Activity Ratios Income Statement/ Balance Sheet Ratios Activity Ratios 365 16.5 = 22.1 days

  7. BW Industry 22.1 46.7 25.4 51.1 43.5 48.5 Year 2007 2006 2005 Activity Ratio Comparisons Payable Turnover in Days BW has improved the PT in Days. Is this good?

  8. Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2007 Indicates the effectiveness of the inventory management practices of the firm. Activity Ratios Income Statement/ Balance Sheet Ratios Activity Ratios $1,599 $696 = 2.30

  9. BW Industry 2.30 3.45 2.44 3.76 2.64 3.69 Year 2007 2006 2005 Activity Ratio Comparisons Inventory Turnover Ratio BW has a very poor inventory turnover ratio.

  10. Trend Analysis of Inventory Turnover Ratio 4.0 3.5 3.0 BW Ratio Value Industry 2.5 2.0 2005 2006 2007 Analysis Year Inventory Turnover Ratio –Trend Analysis Comparison

  11. Total Asset Turnover Net Sales Total Assets For Basket Wonders December 31, 2007 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Activity Ratios Income Statement/ Balance Sheet Ratios Activity Ratios $2,211 $2,169 = 1.02

  12. BW Industry 1.02 1.17 1.03 1.14 1.01 1.13 Year 2007 2006 2005 Activity Ratio Comparisons Total Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?

  13. Gross Profit Margin Gross Profit Net Sales For Basket Wonders December 31, 2007 Indicates the efficiency of operations and firm pricing policies. Profitability Ratios Income Statement/ Balance Sheet Ratios Profitability Ratios $612 $2,211 = 0.277

  14. BW Industry 27.7% 31.1% 28.7 30.8 31.3 27.6 Year 2007 2006 2005 Profitability Ratio Comparisons Gross Profit Margin BW has a weak Gross Profit Margin.

  15. Trend Analysis of Gross Profit Margin 35.0 32.5 30.0 BW Ratio Value (%) Industry 27.5 25.0 2005 2006 2007 Analysis Year Gross Profit Margin –Trend Analysis Comparison

  16. Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high. Summary of Ratio Analyses

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