This document analyzes various financial activity ratios to assess a company's efficiency. It discusses total asset turnover, fixed asset turnover, current asset turnover, inventory turnover, debtor's turnover, and average collection period ratios. These ratios measure how efficiently a company uses its assets to generate sales and turnover. The document also provides the calculations and formulas for each ratio and applies them to data from 2017-2015 to analyze the company's asset usage and receivables collection trends over those years.

1. FINANCIAL STATEMENT AND ANALYSIS
Prepare by: Arpita Mehta Guided by : Hardik Baxi
Submitted to:
Department of Business Administration
Bhavnagar

2. Activity Analysis

3. Literature review
John Myer, a renowned authority on Financial Statements Analysis, has
referred that in the initial years of 20th century, the bankers and securities
exchange authorities were extensively relying on the financial statements
of the companies for analysis, monitoring and control of the activities and
performance of businesses. The history, principles and financial statement
analysis has been referred by another authority also: Kennedy and
McMullen.
Literature on Economics also has a reference to accounting and financial
management. The aim of financial management has been linked with
(1) the field of basic economics, and especially micro economics (use of
scarce resource).
(2) by examining the many and diverse activities and decisions which
occupy financial managers.

4. Introduction
• The activity analysis is sometimes called the
management efficiency analysis or economic
activity analysis. It includes the assessment of the
productivity (turnover) of assets and capital used
by the company. Productivity analysis is based on
the ratios relating the achieved results on sales
(or costs of obtaining them) to the levels of assets
and capital used in the company. The group of
these ratios allows assessing the efficiency of
assets management, which affects both the
financial liquidity and long-term profitability.

5. Meaning of Activity Analysis
• Activity ratios are financial analysis tools used to
gauge the ability of a business to convert various
asset, liability and capital accounts into cash or
sales. The faster a business is able to convert its
assets into cash or sales, the more efficient it
runs. Activity ratios become more meaningful
when compared to industry-average activity
ratios. Different industries have different
industry-average activity ratios and pitting your
ratios against those of peer businesses allows you
to know if your ratios are better or worse.

6. Concept of activity Analysis
• The approach to the activity analysis is done
as follows:
• 1. The growth of activity and its measurement
In terms of investment.
• 2. Activity in relations to total resources
• 3. Component of cost

7. • The growth of activity and its measurement
In terms of investment
The growth in the firm has been measured in terms of the growth of
average year’s sales over the period of study.
• Activity in relations to total resources
Activity ratios are concerned with how efficiency the assets of
the firm are managed or utilized. These ratios indicate the
rate at which different assets are turned over in the process of
doing business. The greater rate of turnover or conversion,
the more efficient the utilization or management, other things
being equal, resulting in higher profitability. Sometimes these
ratios are called efficiency ratios, or investment turnover
ratios. Thus, Turnover ratios reflect the relationship between
the level of the sales and the various assets and a proper
balance between assets and sales shows better management
of assets. Different activity ratios have been computed for
judging the effectiveness of assets utilization.

8. Component of Cost
• Prime Cost
Prime costs are the components that are direct in
nature. Conversion costs are the components to change
raw materials to finished goods.
Prime Costs = Direct Labor + Direct Material
Conversion Costs = Direct Labor + Manufacturing Overhead
• Works Cost
It comprises of prime cost and factory overheads, (cost of
indirect material, indirect labor and indirect expenses
related to factory works). This cost is also known as factory
cost, production or manufacturing cost.

9. Component of Cost
• Cost of Production (Office Cost)
It is the sum total of works cost and office and administrative
overheads <Cost of indirect material, indirect labor and indirect
expenses related to office works). This cost is known as office cost.
Cost of production refers to the total sum of money needed for the
production of a particular quantity of output.
• Total Cost
It comprises of cost of production and selling and distribution
overheads (Cost of indirect material, indirect labor and indirect
expenses for selling and distribution activities).
Total Cost = Cost of Production + Selling and Distribution
Overheads

10. Activity ratio
• Total Asset Turnover Ratio
• Fixed Asset Turnover Ratio
• Current Assets turnover Ratio
• Debtors turnover Ratio
• Average Collection period
• Inventory Turnover Ratio

11. Total Asset turnover
• Asset turnover measures how efficiently a
company uses its total assets to generate
revenues.
• Formula

12. Total Asset turnover
0.8
0.85
0.9
0.95
1
1.05
2017 2016 2015
Total assets turnover ratio
year Total assets
turnover ratio
2017 0.89
2016 0.95
2015 1.03

13. Fixed assets turnover ratio
It measures the company capability to
generate sales from its fixed assets
investments.
Formula
Fixed assets turnover ratio = Net sales /Total
Fixed assets

14. Fixed Asset Turnover Ratio
4.35
4.4
4.45
4.5
4.55
4.6
2017 2016 2015
fixed assets turnover ratio
year Fixed assets
turnover ratio
2017 4.44
2016 4.54
2015 4.59

15. Current assets turnover
• it signifies the total sales done by the
company with an investment in the current
asset. A higher ratio implies that company has
been successful in utilizing the current assets.
Formula :
• Current Assets turnover Ratio= Net sales /
Total current liabilities

16. Current Assets turnover
Ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
2017 2016 2015
Current Assets turnover ratio
year Current
assets
turnover
ratio
2017 3.84
2016 2.10
2015 1.69

17. Inventory turnover
• The high inventory turnover rate can be a sign
that a company’s inventory is too lean, and
the firm may be unable to keep up with any
increased demand. Further more, inventory
turnover is very industry-specific.
Formula :

18. Inventory Turnover Ratio
0
20
40
60
80
100
120
140
2017 2016 2015
Inventory tunover ratio
year Inventory
turnover ratio
2017 129.38
2016 84.92
2015 85.96

19. Debtor’s turnover ratio:
• Debtor turnover ratio are also known as
receivable turnover ratio. The accounts
receivable turnover ratio measures how many
times a business can collect its average
accounts receivable during the year.
Formula :
• Debtor turnover ratio= Annual net credit
sales / Average Account receivable

20. Debtor turnover ratio
• Debtor turnover ratio=
Annual net credit sales
/Average Account
receivable
year Debtor turnover
ratio
2017 5.47
2016 5.30
2015 4.94 4.6
4.7
4.8
4.9
5
5.1
5.2
5.3
5.4
5.5
2017 2016 2015
debtor turnover ratio

21. Average collection period
• The average collection period indicates the
average number of days elapsed between a
credit sale and the date the company receives
the payment from the credit sale.
Formula:
Average collection period= Account receivable /
Sales *360

22. Average collection period
Year Account
receivable /
sales *360
Average
collection
period
2017 8129.90/45639.6
0*360
64
2016 8704.80/44680.8
0*360
70
2015 8144.20/41209.8
0*360
71
60
62
64
66
68
70
72
2017 2016 2015
Average collection period

23. Conclusion
• The activity ratio analysis is being applied for the measurement of the
company’s working capital usage efficiency. Activity ratios indicate if a firm
manages its inventories, cash, receivables and payables and other assets
well.
• Activity ratios measure company sales per another asset account the most
common asset accounts used are accounts receivable, inventory, and total
assets. Activity ratios measure the efficiency of the company in using its
resources. Since most companies invest heavily in accounts receivable or
inventory, these accounts are used in the denominator of the most
popular activity ratios.
• The efficiency is measured in terms of generation of revenue by the
respective assets.
• Total assets turnover shows is how efficiently a company can use its assets
to generate sales.

24. • Fixed assets turnover is declining ratio may indicate that the
business is over-invested in plant, equipment, or other fixed assets,
and also current assets turnover is managed and uses its assets to
produce products and sales.
• Inventory turnover ratios are company does not spend by storing
non-salable inventory.
• Debtor’s turnover ratios an accounting measure used to measure
how effective a company is in extending credit as well as collecting
debts.
• Last the average collection period ratio is Monitoring the average
collection period is important for a company's cash flow and its
ability to meet its obligations when they come due.