CMA2 Activity Ratios

Question 1

Accounts Receivable Turnover Ratio (ARTO)

Answer 1

ARTO = Credit Sales / Average Gross Accounts Receivable
○ You want a higher ratio because it means higher sales but quick payment
○ Credit sales is the same thing as Sales on Account
- This is related to collection efficiency; it measures the number of times the average accounts receivable was collected
- How much credit a company can grant to customers and how fast payment can be collected from them. Basically an interest free loan to customers.

Question 2

Inventory Turnover (ITO)

Answer 2

ITO = Cost of Goods Sold / Average Inventory
○ Higher is better because it means high sales and lower inventory on hand
○ COGS = Beginning Inventory + Purchases - Ending Inventory
- This is related to collection efficiency; it measures the number of times the average accounts receivable was collected
Number of times an inventory was sold

Question 3

Accounts Payable Turnover (APTO)

Answer 3

APTO = Credit Purchases / Average Accounts Payable
- Measures the number of times the average accounts payable was paid
- How effective a company is at leveraging interest free debt when making purchases and managing their accounts payable

Question 4

Days Sales Outstanding in Receivables (DSO)

Answer 4

DSO = 365 days / ARTO… or…
DSO = Average Accounts Receivable / (Credit Sales / 365 days)
○ ARTO = Credit Sales / Average Gross Accounts Receivable
- The average number of days before a credit sale is collected

Question 5

Days Sales in Inventory (DSI)

Answer 5

DSI = 365 days / ITO… or …
DSI = Average Inventory / (Cost of Sales / 365 days)
○ ITO = Cost of Goods Sold / Average Inventory
- Average number of days before the inventory is sold

Question 6

Days Purchases in Accounts Payable (DPAP)

Answer 6

DPAP = 365 days / APTO …or…
DPAP = Average Payables / (Credit Purchases / 365 days)
○ APTO = Credit Purchases / Average Accounts Payable
- Average number of days before a credit purchase is paid

Question 7

Operating Cycle (OC)

Answer 7

• OC = DSO + DSI
  ○ The shorter, the better
  Days Sales Outstanding, Days Sales of Inventory
• Average number of days from the purchase or production of inventory until cash is collected from receivables… or…
• time inventory is ordered + the time waiting for cash to be paid by customers

Question 8

Cash Cycle (CC)

Answer 8

CC = DSO + DSI - DPAP …or…
CC = OC - DPAP
(Day Purchases in Accounts Payable)
- The average number of days from payment of accounts payable until cash is collected from receivables… or…
- Time cash goes out to pay for inventory ordered + time waiting for cash to be paid by customers
- Shorter than the Operating Cycle because cash may not be paid immediately for inventory ordered for future sale.

Question 9

Total Assets Turnover (TAT)

Answer 9

TAT = Sales / Average Total Assets
- Measures the revenue (or sales) efficiency of total assets
- How much sales are generated for the dollars invested

Question 10

Fixed Assets Turnover (FAT)

Answer 10

FAT = Sales / Average Net Property, Plant, and Equipment
- Measures the revenue (or sales) efficiency of fixed assets