1. 6.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Chapter 6 Activity ratios

2. 6.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007 Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007 Indicates quality of receivables and how successful the firm is in its collections. Income Statement/ Balance Sheet Ratios Activity Ratios $2,211$394 5.61 = 5.61 (Assume all sales are credit sales.) Activity Ratios

3. 6.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2007 Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Income Statement/ Balance Sheet Ratios Activity Ratios 3655.61 65 days = 65 days Activity Ratios

4. 6.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 65.065.7 71.166.3 83.669.2 BW Industry 65.065.7 71.166.3 83.669.2 Year 2007 2006 2005 Average Collection Period BW has improved the average collection period to that of the industry average. Activity Ratio Comparisons

5. 6.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2007 Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1551$94 16.5 = 16.5 (Assume annual credit purchases = $1,551.) Activity Ratios

6. 6.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2007 PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Income Statement/ Balance Sheet Ratios Activity Ratios 36516.5 22.1 days = 22.1 days Activity Ratios

7. 6.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 22.146.7 25.451.1 43.548.5 BW Industry 22.146.7 25.451.1 43.548.5 Year 2007 2006 2005 Payable Turnover in Days BW has improved the PT in Days. Is this good? Activity Ratio Comparisons

8. 6.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2007 Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2007 Indicates the effectiveness of the inventory management practices of the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1,599$696 2.30 = 2.30 Activity Ratios

9. 6.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 2.303.45 2.443.76 2.643.69 BW Industry 2.303.45 2.443.76 2.643.69 Year 2007 2006 2005 Inventory Turnover Ratio BW has a very poor inventory turnover ratio. Activity Ratio Comparisons

10. 6.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Inventory Turnover Ratio 2.0 2.5 3.0 3.5 4.0 200520062007 Analysis Year Ratio Value BW Industry Inventory Turnover Ratio – Trend Analysis Comparison

11. 6.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Total Asset Turnover Net Sales Total Assets For Basket Wonders December 31, 2007 Total Asset Turnover Net Sales Total Assets For Basket Wonders December 31, 2007 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement/ Balance Sheet Ratios Activity Ratios $2,211$2,169 1.02 = 1.02 Activity Ratios

12. 6.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 1.021.17 1.031.14 1.011.13 BW Industry 1.021.17 1.031.14 1.011.13 Year 2007 2006 2005 Total Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak? Activity Ratio Comparisons

13. 6.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Gross Profit Margin Gross Profit Net Sales For Basket Wonders December 31, 2007 Gross Profit Margin Gross Profit Net Sales For Basket Wonders December 31, 2007 Indicates the efficiency of operations and firm pricing policies. Income Statement/ Balance Sheet Ratios Profitability Ratios $612$2,211 0.277 = 0.277 Profitability Ratios

14. 6.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 27.7%31.1% 28.730.8 31.327.6 BW Industry 27.7%31.1% 28.730.8 31.327.6 Year 2007 2006 2005 Gross Profit Margin BW has a weak Gross Profit Margin. Profitability Ratio Comparisons

15. 6.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Gross Profit Margin 25.0 27.5 30.0 32.5 35.0 200520062007 Analysis Year Ratio Value (%) BW Industry Gross Profit Margin – Trend Analysis Comparison

16. 6.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high. Inventories are too high. May be paying off creditors (accounts payable) too soon. COGS may be too high. Selling, general, and administrative costs may be too high. Summary of Ratio Analyses