Question

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

a. current ratio
b. equity multiplier
c. retention ratio
d. capital intensity ratio
e. payout ratio

Answer 1

The capital intensity ratio is used to identify the amount of assets needed by a firm to generate $1 in sales, calculated by dividing total assets by net sales. The correct option is d) capital intensity ratio.

Step-by-step explanation:

The amount of assets a firm needs to generate $1 in sales is identified by the capital intensity ratio. This ratio is calculated by dividing total assets by net sales (or revenue). It reflects how much a company invests in assets to achieve its sales level. A higher capital intensity ratio indicates that a company requires more assets to generate a single dollar of sales, which may imply greater efficiency in asset usage or perhaps a more asset-heavy business model.

Here's how to calculate it:

1. Determine the total assets of the firm from the balance sheet.
2. Find the net sales (or revenue) figure from the income statement.
3. Divide the firm's total assets by its net sales (Total Assets / Net Sales).

The final answer is d) capital intensity ratio. This ratio aids investors and creditors in analyzing how effectively a firm is utilizing its assets to produce sales.