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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Fixed asset turnover ratio

Financial statement data for years ending December 31 for Davenport Company follow:

Year 2 Year 1
Sales $1,668,000 $1,125,000
Fixed assets:
Beginning of year 670,000 580,000
End of year 720,000 670,000

a.    Determine the fixed asset turnover ratio for Year 1 and Year 2.

b.    Does the change in the fixed asset turnover ratio from Year 1 to Year 2 indicate a favorable or an unfavorable change?

a.

To determine

Fixed Asset turnover: It is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets. The following is the formula to calculate the ratio:

FixedAsset turnover =SalesAverage totalfixed assets

To determine: the fixed asset Turnover Ratio of Company D for Year 1 ad Year 2.

Explanation

Calculate the fixed asset turnover ratio:

For Year 1

Sales= $1,125,000

Total average fixed assets= $625,000 (1)

FixedAssets Turnover=SalesAverage FixedAssets=$1,125,000$625,000=1.8times

Working note:

Calculate the average total fixed assets.

Beginning total fixed assets = $580,000

Ending total fixed assets  = $670,000

Average total assets=Total Beginning FixedAssets+Total EndingFixed Assets2=$580,000+$670,0002=$625,000

b.

To determine

To explain: whether the change in the fixed asset turnover ratio from Year 1 to Year 2 indicates a favorable or unfavorable change.

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