However if customers use a firm sponsored credit card

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However, if customers use a firm-sponsored credit card (e.g., JC Penney’s Card), then the ratio is very important because the customers' balances on the credit card will be reflected as a receivable on the balance sheet. Firms can factor or sell their accounts receivable to a financial institution for a fee to speed up cash collection. Factoring receivables reduces the receivable balance and increases the receivable turnover. Higher receivable turnover is positively related to cash flow from operations. Inventory turnover = CGS Average Inventory This ratio measures the number of times the average balance in inventory is sold during the year. It captures the speed with which inventory moves through operations. 365/Inventory Turnover = Average number of days inventory is held CGS & Avg. inventory are internal costs, if you include revenue then one cost will be outside or selling price while 2 nd will be internal cost, hence will not be able to get proper glimpse of company internal issues if we include any outside factor. This ratio will vary greatly depending on the nature of the inventory. Meat packers will have high inventory turnover while jewelry stores will have low turnover. High inventory turnover indicates a firm is selling goods quickly, which will lower storage costs, reduces the need for markdowns, and decrease CGS/Sales. High inventory turnover is positively related to cash flow from operations because selling inventory more quickly brings in cash more quickly. For Manufacturing firms, this ratio is production time + selling time. However, inventory turnover that is too high can lead to shortages that result in lost sales. 2
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Riffe – ACCT 6201 – Session 7 – Fall 2018 PPE turnover = Sales Revenue Average Net PPE A higher ratio indicates greater effectiveness in using fixed assets to generate revenues. Net PPE = PPE-Accumulated Depreciation Sales revenue in the numerator does not include the cash from selling fixed assets. Fixed assets on the balance sheet are used to generate sales, but it is inappropriate to say that sales revenue increased because a firm “sold more fixed assets during the period.” High number indicates lower level of PPE is necessary to generate annual sales volume, which indicates effective use of their fixed asset base. This ratio is extremely important for capital-intensive firms like manufacturing firms, utilities, or airlines. There is often a lag between investments in PPE and sales. Accordingly, a growth firm may experience a decline in fixed asset turnover as they invest in new PPE. Overview of Productivity A turnover ratio is not calculated for every asset account. Changes in large asset accounts like intangibles or investments can have a big impact on total asset turnover. To analyze this possibility, calculate the percentage of assets not captured by individual turnover ratios: Asset Accounts % of Assets for TI in 2017 AR 7.24% Inventory 11.09% PPE 15.10% Other Assets Where an Individual Turnover Ratio is Not Calculated 66.57% For TI, 66.57% of total assets in the denominator of asset turnover are not reflected in the 3 asset turnover ratios calculated.
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  • Fall '09
  • Robbins
  • Balance Sheet, Generally Accepted Accounting Principles, TI

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