Question

Buddy 4Me Inc. reported sales of $400,000 and average total assets of $200,000,$50,000 of which is property, plant, and equipment. The company has net income of $25,000 and average stockholders' equity of $50,000. What is the company's asset turnover ratio?

Answer 1

The asset turnover ratio for Buddy 4Me Inc. is calculated by dividing total net sales by average total assets, which in this case is 2. This indicates that for every dollar of assets, the company generates $2 in sales, demonstrating efficient use of its assets.

Step-by-step explanation:

Calculating the Asset Turnover Ratio

Buddy 4Me Inc.'s asset turnover ratio is a measure of how efficiently the company uses its assets to generate sales. The formula to calculate the asset turnover ratio is total net sales divided by average total assets. Given that Buddy 4Me Inc. reported sales of $400,000 and average total assets of $200,000, we can calculate the asset turnover ratio as follows:

Asset Turnover Ratio = Total Net Sales / Average Total Assets = $400,000 / $200,000 = 2

This ratio means that for every dollar of assets Buddy 4Me Inc. owns, it generates $2 in sales. An asset turnover ratio of 2 is generally considered efficient, as it indicates the company is using its assets effectively to produce sales. This financial metric is crucial for investors and creditors to assess the company's operational efficiency.