Question

You are analyzing two companies that manufacture electronic toys--Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $200,000 each. You've gathered up company data to compare Like Games and Our Play. Last year, the average sales for industry competitors was $510,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows:

Like Games
Accounts receivable: 5,400
Net fixed assets: 110,000
Total assets: 190,000
Our Play
Accounts receivable: 7,800
Net fixed assets: 160,000
Total assets: 250,000
Industry Average
Accounts receivable: 7,700
Net fixed assets: 433,500
Total assets: 469,200
Using this information, complete the following statements in your analysis.
1. A _____ days of sales outstanding represents an efficient credit and collection policy. Between the two companies, _____ is collecting cash from its customers faster than _____, but both companies are collecting their receivables less quickly than the industry average.
2. Our Play's fixed assets turnover ratio is _____ than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition cost of it fixed assets is _____ that the recorded cost of Like Games's net fixed assets.
3. Like Games's total assets turnover ratios is _____, which is _____, than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Answer 1

1. A LOWER days of sales outstanding represents an efficient credit and collection policy. Between the two companies, LIKE GAMES is collecting cash from its customers faster than OUR PLAY, but both companies are collecting their receivables less quickly than the industry average.

2. Our Play's fixed assets turnover ratio is LOWER than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition cost of it fixed assets is HIGHER that the recorded cost of Like Games's net fixed assets.

3. Like Games's total assets turnover ratios is 1.05, which is LOWER than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Step-by-step explanation:

DSO = (accounts receivable / credit sales) x 365

DSO industry = (7,700 / 510,000) x 365 = 5.5 days

DSO Like Games = (5,400 / 200,000) x 365 = 9.9 days

DSO Our Play = (7,800 / 200,000) x 365 = 14.2 days

Fixed asset turnover ratio = net sales / average fixed assets

Fixed asset turnover ratio industry = 510,000 / 433,500 = 1.18

Fixed asset turnover ratio Like Games = 200,000 / 110,000 = 1.82

Fixed asset turnover ratio Our Play = 200,000 / 160,000 = 1.25

Total asset turnover ratio = net sales / average total assets

Total asset turnover ratio industry = 510,000 / 469,200 = 1.09

Total asset turnover ratio Like Games = 200,000 / 190,000 = 1.05

Total asset turnover ratio Our Play = 200,000 / 250,000 = 0.8