Question

Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio.

Consider the following case:
Franklin Aerospace has a quick ratio of 2.00x, $36,225 in cash, $20,125 in accounts receivable, some inventory, total current assets of $80,500, and total current liabilities of $28,175. The company reported annual sales of $200,000 in the most recent annual report. Additionally, the company’s cost of goods sold is 75% of sales.
Over the past year, how often did Franklin Aerospace sell and replace its inventory?
A. 6.83x
B. 6.21x
C. 2.86x
D. 8.01x

Answer 1

To find Franklin Aerospace's inventory turnover ratio, subtract cash and accounts receivable from total current assets to find inventory value and divide COGS by this inventory value. With COGS at $150,000 and inventory at $24,150, the turnover ratio is approximately 6.21x, meaning Franklin Aerospace replaced its inventory about 6.21 times in one year.

Step-by-step explanation:

The question revolves around calculating the inventory turnover ratio, which measures how many times a company sells and replaces its inventory over a certain period. To determine the inventory turnover for Franklin Aerospace, we use the formula: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory. Given that the COGS is 75% of the annual sales, COGS equals 0.75 * $200,000 = $150,000. However, we are not provided with the average inventory directly.

Since we know the total current assets ($80,500) and have individual amounts for cash and accounts receivable, we can calculate the inventory value by subtracting cash and accounts receivable from total current assets, which gives us Inventory = $80,500 - $36,225 - $20,125 = $24,150. Now we can calculate the inventory turnover ratio: Inventory Turnover Ratio = $150,000 / $24,150 = approximately 6.21x. Therefore, the correct answer is B. 6.21x, indicating that Franklin Aerospace sold and replaced its inventory approximately 6.21 times over the past year.