The company had only a 22 day supply of the buick

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Unformatted text preview: ly for GM, its crossover vehicles were a hit. The company had only a 22-day supply of the Buick Enclave and a 32-day supply of the GMC Acadia. RECEIVABLES TURNOVER AND DAYS’ SALES IN RECEIVABLES Our inventory measures give some indication of how fast we can sell products. We now look at how fast we collect on those sales. The receivables turnover is defined in the same way as inventory turnover: Receivables turnover Sales ______________________ Accounts receivable $2,311 ________ $188 12.3 times [3.11] Loosely speaking, we collected our outstanding credit accounts and reloaned the money 12.3 times during the year.2 2 Here we have implicitly assumed that all sales are credit sales. If they were not, then we would simply use total credit sales in these calculations, not total sales. 52 PART 1 Overview ros82361_ch03.indd ros82361_ch03.indd 52 5/27/08 10:14:59 AM Confirming Pages This ratio makes more sense if we convert it to days, so the days’ sales in receivables is: Days’ sales in receivables 365 days _______________________ Receivables turnover 365 _____ 12.3 30 days [3.12] Therefore, on average, we collect on our credit sales in 30 days. For obvious reasons, this ratio is very frequently called the average collection period (ACP). Also note that if we are using the most recent figures, we can also say that we have 30 days’ worth of sales currently uncollected. EXAMPLE 3.2 P a y a b l e s Tu r n o v e r Here is a variation on the receivables collection period. How long, on average, does it take for Prufrock Corporation to pay its bills? To answer, we need to calculate the accounts payable turnover rate using cost of goods sold. We will assume that Prufrock purchases everything on credit. The cost of goods sold is $1,344, and accounts payable are $344. The turnover is therefore $1,344/$344 3.9 times. So, payables turned over about every 365/3.9 94 days. On average, then, Prufrock takes 94 days to pay. As a potential creditor, we might take note of this fact. TOTAL ASSET TURNOVER Moving away from specific accounts like inventory or receivables, we can consider an important “big picture” ratio, the total asset turnover ratio. As the name suggests, total asset turnover is: Total asset turnover Sales _____________ Total assets $2,311 ________ $3,588 .64 times [3.13] You can find a useful utility for extracting EDGAR data at www.edgar-online.com. In other words, for every dollar in assets, we generated $.64 in sales. EXAMPLE 3.3 M o r e Tu r n o v e r Suppose you find that a particular company generates $.40 in sales for every dollar in total assets. How often does this company turn over its total assets? The total asset turnover here is .40 times per year. It takes 1/.40 = 2.5 years to turn assets over completely. Profitability Measures The three measures we discuss in this section are probably the best known and most widely used of all financial ratios. In one form or another, they are intended to measure how efficiently the firm uses its assets and how e...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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