9609 · 10.2.3
Practice and worked examples for 9609 Financial efficiency ratios. Short previews only — attempt the full question in MarkScheme against the official scheme.
Inventory $45 000; cost of sales $328 000; trade receivables $62 000; credit sales $492 000.
Calculate inventory days and receivables days.
Inventory days = (45 000 ÷ 328 000) × 365 = 50 days (approx.)
Receivables days = (62 000 ÷ 492 000) × 365 = 46 days (approx.)
On average, inventory is held 50 days before sale; credit customers pay 46 days after sale — compare to prior year or industry for interpretation.
A manufacturing firm, 'Precision Parts Ltd', provides the following data from its Statement of Financial Position and Income Statement for 2023:
The industry average asset turnover ratio is 1.8. Calculate Precision Parts Ltd's asset turnover ratio and briefly comment on its performance.
Step 1: Calculate Capital Employed (Net Assets) Capital Employed = Non-current assets + (Current assets - Current liabilities) Capital Employed = $1,200,000 + ($600,000 - $300,000) Capital Employed = $1,200,000 + $300,000 = $1,500,000
Step 2: Calculate Asset Turnover Ratio Asset Turnover = Revenue / Capital Employed Asset Turnover = $2,500,000 / $1,500,000 Asset Turnover = 1.67 (to 2 d.p.)
Comment on Performance: Precision Parts Ltd's asset turnover ratio of 1.67 indicates that it generates $1.67 in revenue for every $1 of capital employed. This is below the industry average of 1.8. This suggests that the company is less efficient at using its assets to generate sales compared to its competitors. Management should investigate the reasons, which could include underutilised machinery (low capacity utilisation) or a need to boost sales volume.