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Activity Ratio

Activity ratios measure the efficiency of asset usage within a firm, evaluating benefits from specific assets like inventory and accounts receivable. Key ratios include Inventory Turnover, Accounts Receivable Turnover, and Total Assets Turnover, which indicate how well a company sells and replaces stock, collects credit sales, and generates sales from total assets. High ratios suggest strong performance, while low ratios may indicate issues such as dead stock or idle assets.

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7 views1 page

Activity Ratio

Activity ratios measure the efficiency of asset usage within a firm, evaluating benefits from specific assets like inventory and accounts receivable. Key ratios include Inventory Turnover, Accounts Receivable Turnover, and Total Assets Turnover, which indicate how well a company sells and replaces stock, collects credit sales, and generates sales from total assets. High ratios suggest strong performance, while low ratios may indicate issues such as dead stock or idle assets.

Uploaded by

Myca Lontoc
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

ACTIVITY RATIO

-Activity ratios are measures of how well assets are used. Also known as Efficiency Ratio.
- This can be used to evaluate the benefits produced by specific assets, such as inventory or accounts
receivable or by all a firm’s assets collectively.
- The most common turnover ratio are:

[Link] TURNOVER RATIO


- is the ratio of cost of goods sold to inventory.
-This ratio indicates how many times inventory is
created and sold during the period.
2. ACCOUNT RECIEVABLE TURNOVER RATIO
Cost of Goods sold - is the ratio of net credit sales to accts.
Inventory Turnover = receivables.
Average Inventory -This ratio indicates how many times in the
period credit sales have been created and
collected on.
365 days
Days Inventory Held = How efficient are we at collecting money from
Inventory Turnover customers who owe us?

REMEMBER:
How many times did we sell and replace our stock High Ratio – getting cash back quickly to pay own
this year? bills.
Low Ratio – red flag, considered bad debts.
REMEMBER:
High Ratio – It means strong sales and efficient EXAMPLE:
buying.
Low Ratio - It suggest dead stock or poor sales. Average Acct. Re.: 180 000 + 220 000 = 400 000
400 000 / 2 = 200 000
Hotcakes – Bestselling / fast moving
Lemon – Slow moving AR Turnover = 2 000 000 / 200 000 = 10x
Days Inventory Held = 365 / 10 = 36.5 (1mth 1
EXAMPLE: week)
Average Inventory: 250 000 + 350 000 = 600 000
600 000 / 2 = 300 000

Inventory Turnover = 1 200 000 / 300 000 = 4x


Days Inventory Held = 365 / 4 = 91.25

3. TOTAL ASSETS TURNOVER RATIO


-is the ratio of sales to total assets.
-This ratio indicates the extent that the investment in total assets results in sales.

Net Sales
Total Asset Turnover =
Average Total Assets

REMEMBER:
High Ratio – It means Lean and Mean
Low Ratio – Idle Assets
Net Credit Sales
EXAMPLE:
Acct. Receivable Turnover =
Average Acct. Receivable
Average Total Asset: 1 030 000 + 1 300 000 = 2
330 000
2 330 000 / 2 = 1365
165days
000
Days Sales Outstanding=
Acct.
Total Asset Turnover = 2 000 000Receivable
/ 1 165 000Turnover
= 1.72

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