P2A.2.4 Financial Ratios - Activity

Question 1

Activity Ratios

Answer 1

Measures the efficiency of a company in using its assets and liabilities.

Question 2

Accounts Receivable Turnover Ratio (ARTO)

Answer 2

1. Measures the number of times the average accounts receivable was collected.
2. Favorable to have a high ARTO as it indicates collection efficiency.
3. Average collection period for receivables is a measure of liquidity.

Question 3

Accounts Receivable Turnover Ratio Formula

Answer 3

ARTO = Credit Sales / Average Gross Accounts Receivable

Question 4

Inventory Turnover Ratio (ITO)

Answer 4

1. Measures the number of times the average inventory was sold.
2. Favorable to have a high ITO as it indicates sales efficiency.

Question 5

Inventory Turnover Ratio Formula

Answer 5

ITO = Costs of Goods Sold / Average Inventory

Question 6

Accounts Payable Turnover Ratio (APTO)

Answer 6

1. Measures the number of times the average accounts payable was paid.
2. Relates to paid ability.
3. Favorable to have a high APTO as it indicates a good short-term liquidity.

Question 7

Accounts Payable Turnover Ratio Formula

Answer 7

APTO = Credit Purchases / Average Accounts Payable

Question 8

Days Sales Outstanding in Receivables Ratio (DSO)

Answer 8

1. Average number of days before a credit sale is collected.

2. Favorable to have a low DSO as it indicates collection efficiency.

Question 9

Days Sales Outstanding in Receivables Ratio Formula

Answer 9

DSO = 365 / Accounts Receivable Turnover Ratio

DSO = 365* Average Accounts Receivable / Credit Sales

Question 10

Days Sales in Inventory Ratio (DSI)

Answer 10

1. Average number of days before inventory is sold.

2. Favorable to have a low DSI as it indicates sales efficiency.

Question 11

Days Sales in Inventory Ratio Formula

Answer 11

DSI = 365 / Inventory Turnover Ratio

DSI = 365 * Average Inventory / Cost of Goods Sold

Question 12

Days Purchases in Accounts Payable Ratio (DPAP)

Answer 12

1. Average number of days before a purchase on account is paid.
2. The number of days from the time inventory is purchased on credit to the day the vendor bill is paid from accounts payable.
3. Favorable to have a low DPAP as it indicates good short-term liquidity.

Question 13

Days Purchases in Accounts Payable Ratio Formula

Answer 13

DPAP = 365 / Accounts Payable Turnover Ratio

DPAP = 365 * Average Accounts Payable / Purchases on Account

Question 14

Operating Cycle (OC)

Answer 14

1. The average number of days from the purchase or production of inventory until cash is collected from receivables.
2. The shorter the cycle, the better.

Question 15

Operating Cycle Formula

Answer 15

OC = Days Sales in Inventory (DSI) + Days Sales Outstanding (DSO)

Question 16

Cash Cycle (CC)

Answer 16

1. Average number of days from payment of accounts payable until cash is collected from receivables.
2. The shorter the cycle, the better.

Question 17

Cash Cycle Ratio

Answer 17

CC = Day Sales in Inventory (DSI) + Day Sales Outstanding (DSO) - Days Purchase in Account Payables (DPAP)

CC = Operating Cycle (OC) - Day Purchase in Accounts Payable (DPAP)

Question 18

Operating & Cash Cycle

Answer 18

Purchase of Inventory → Payment of Accounts Payable → Sales of Inventory → Collection of Accounts

Question 19

Total Assets Turnover Ratio (TAT)

Answer 19

1. Measures the efficiency of the company’s total assets in generating sales (revenue).

Question 20

Total Asset Turnover Ratio Formula

Answer 20

TAT = Sales / Average Total Assets

Question 21

Fixed Assets Turnover Ratio (FAT)

Answer 21

1. Measures the efficiency of the company’s fixed assets in generating sales (revenue).

Question 22

Fixed Asset Turnover Ratio Formula

Answer 22

FAT = Sales / Average Net Fixed Assets