Finance Chapter 3: Asset Management Ratios

Study Notes

Asset Management Ratios

Measure investment in specific asset types relative to the revenue generated by those assets.
Essential for understanding efficiency in utilizing assets to produce sales.

Average Collection Period

Formula: Accounts Receivable divided by (Annual Credit Sales divided by 365).
Indicates the average time taken to collect payments from customers.

Inventory Turnover Ratio

Formula: Cost of Sales divided by Average Inventory.
Assesses how effectively a company manages its inventory in relation to sales.

Average Inventory

Calculation based on sales growth:
- For constant growth: (Beginning Inventory + Ending Inventory) divided by 2.
- For fluctuating sales: (Sum of Month-End Inventory Balances) divided by 12.
Provides an average value of inventory held over a period.

Sales-To-Inventory Ratio

Formula: Annual Sales divided by Ending Inventory.
Reflects how efficiently inventory is being converted into sales.

Fixed-Asset Turnover Ratio

Formula: Sales divided by Net Fixed Assets.
Evaluates how well a company utilizes its fixed assets to generate sales.

Total Asset Turnover Ratio

Formula: Sales divided by Total Assets.
Measures overall efficiency in using all assets to produce revenue.

Description

Test your knowledge on Asset Management Ratios with these flashcards. This quiz covers key terms such as Average Collection Period and Inventory Turnover Ratio, helping you understand the efficiency of asset use in generating revenue. Perfect for finance students looking to reinforce their learning.