2. #1= Asset Turnover Ratio This ratio compares sales revenue with average assets to see how well we are using our assets to generate revenue. Example: In 2010 our ATO was 1.2 times whilst in 2011 it was 1.35 times. This meant that even though our assets between the years increased by $10,000, we have been using the assets more effectively in 2011 meaning in 2011 we generated sales 1.35 time the amount of our assets.
3. #2 = Stock Turnover Rate This assesses how effectively the firm has managed its stock, by calculating the average number of days taken to convert stock into sales. We multiply by 365 to get the rate as a ‘number of days’ rate. We ideally want this ratio to be as low as possible.
4. Example: In 2010, it took us 101 days to sell stock whilst in 2011 it took us 73 days. The reason for this is not only did we hold less stock on hand, we sold more stock.
5. (Students take own notes here) From page 390 and 391 of the other textbook, take notes on: If stock turnover is too high or too low What are some stock management issues
6. #3 = Debtor Turnover Rate Debtor Turnover measures the average number of days it takes to collect cash from debtors. Using the same example as the Stock Turnover but with more information:
7. We see that in 2011 it took us on average 3 days longer to receive cash from our debtors. This is because even though credit sales increased (the bottom of the ratio), the average debtors increased proportionately more (the top of the ratio). As we are using the same example for stock and debtor turnover we can make this point. As the business sells on both cash and credit we can calculate the overall time it takes for the business to convert stock into cash by adding both the stock turnover (amount of time taken to convert stock to sales being 73 days in 2011) and debtor turnover (amount of days it takes to convert any debtors to cash being 64 days in 2011). Therefore meaning it takes on average 137 days to convert stock to cash.
8. (Students take own notes here) From page 392 and 393 of the other textbook, take notes on: Assessing debtor turnover Debtor management
