Asset management ratios are used to measure how effectively a firm manages its a
ID: 2335364 • Letter: A
Question
Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio. Consider the following case: Monroe Manufacturing has a quick ratio of 2.00x, $37,575 in cash, $20,875 in accounts receivable, some inventory, total current assets of $83,500, and total current liabilities of $29,225. The company reported annual sales of $300,000 in the most recent annual report. Over the past year, how often did Monroe Manufacturing sell and replace its inventory? 11.98 x O 2.86 x 8.01x O 13.18 x The inventory turnover ratio across companies in the manufacturing industry is 10.18x. Based on this information, which of the following statements is true for Monroe Manufacturing? O Monroe Manufacturing is holding more inventory per dollar of sales compared to the industry average. O Monroe Manufacturing is holding less inventory per dollar of sales compared to the industry average.Explanation / Answer
Inventory = Total current assets - Cash - Accounts receivable
= $83,500 - $37,575 - $20,875
= $25,050
Inventory turnover ratio indicates how often a company sold and replaced its inventory.
Inventory turnover ratio = Sales / Inventory
= $300,000 / $25,050
= 11.98 times
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Companies in the manufacturing industry are selling their inventory 10.18 times during a period and Monroe Manufacturing is selling 11.98 times during a period, as a result Monroe Manufacturing is holding less inventory per dollar sales compared to the industry average.
The answer is - Monroe Manufacturing is holding less inventory per dollar of sales compared to the industry average.