Analysis of Asset Management Ratios in Financial Statements
Question 1:
Over the past year, how often did Polk Software Inc sell and replace its inventory?
Answer:
The inventory turnover ratio for Polk Software Inc. cannot be determined without the cost of goods sold. This ratio measures how often a company sells and replenishes its inventory. It is calculated by dividing the cost of goods sold by the average inventory. Given that the information for the cost of goods sold is not provided, we cannot ascertain the exact frequency of inventory turnover for Polk Software Inc.
Explanation:
Inventory Turnover Ratio: The inventory turnover ratio is a crucial asset management ratio that indicates how efficiently a company is managing its inventory. A higher ratio signifies that the company is selling its inventory quickly and efficiently.
In the case of Polk Software Inc, the quick ratio is given as 2.00x, with total current assets of $55,000 and total current liabilities of $19,250. However, without access to the cost of goods sold data, we cannot accurately determine the inventory turnover ratio. This ratio is essential for evaluating the company's inventory management practices and overall efficiency in asset utilization.
Question 2:
Based on the provided information, which of the following statements is true for Polk Software Inc?
Answer:
Polk Software Inc. is holding less inventory per dollar of sales compared to the industry average.
Explanation:
Comparative Analysis: The inventory turnover ratio across companies in the software industry is 10.302x. This ratio indicates how efficiently companies are managing their inventory to generate sales revenue. In the case of Polk Software Inc, the company's quick ratio is 2.00x, with total current assets of $55,000.
Comparing the industry-average inventory turnover ratio to Polk Software Inc, we can infer that the company is holding less inventory per dollar of sales. This suggests that Polk Software Inc has effective inventory management practices in place, allowing for a quicker turnover of inventory compared to industry competitors.
Question 3:
How do the total assets turnover ratios of Like Games Inc and Our Play Inc compare to the industry average?
Answer:
Both Like Games Inc. and Our Play Inc. have total assets turnover ratios lower than the industry average.
Explanation:
Total Assets Turnover Ratio: The total assets turnover ratio measures how efficiently a company utilizes its assets to generate sales revenue. A higher ratio indicates better asset management and overall efficiency in utilizing investments.
In the provided scenario, both Like Games Inc. and Our Play Inc. have total assets turnover ratios lower than the industry average. This suggests that both companies could improve their asset utilization to generate more revenue per dollar of investment in assets. By implementing strategies to enhance asset efficiency, such as optimizing inventory management and streamlining operations, both companies can enhance their total assets turnover ratios and improve financial performance.