FINAN.ACCOUNTING-W/DGT ACCESS (LOOSE)
FINAN.ACCOUNTING-W/DGT ACCESS (LOOSE)
15th Edition
ISBN: 9781337587488
Author: WARREN
Publisher: CENGAGE L
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Chapter 10, Problem 9PEA

a.

To determine

Determine the fixed asset Turnover Ratio of Company D for Year 1 ad Year 2.

a.

Expert Solution
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Explanation of Solution

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

Calculate the fixed asset turnover ratio:

For Year 1

Sales= $4,880,000

Total average fixed assets= $1,525,000 (1)

FixedAssets Turnover=SalesAverage FixedAssets=$4,880,000$1,525,000=3.2times

Working note 1: Calculate the average total fixed assets.

Beginning total fixed assets     = $1,450,000

Ending total fixed assets      = $1,600,000

Average total assets=Total Beginning FixedAssets+Total EndingFixed Assets2=$1,450,000+$1,600,0002=$1,525,000

For Year 2

Sales= $5,510,000

Total average fixed assets= $1,900,000 (2)

FixedAssets Turnover=SalesAverage FixedAssets=$5,510,000$1,900,000=2.9times

Working note 2: Calculate the average total fixed assets.

Beginning total fixed assets     = $1,600,000

Ending total fixed assets      = $2,200,000

Average total assets=Total Beginning FixedAssets+Total EndingFixed Assets2=$1,600,000+$2,200,0002=$1,900,000

Conclusion

Hence, the fixed asset turnover ratio for Year 1 is 3.2 times and for Year 2 is 2.9 times.

b.

To determine

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

b.

Expert Solution
Check Mark

Explanation of Solution

The change in the fixed asset turnover ratio from Year 1 to Year 2 indicates an unfavorable change as the ratio decreased from 3.2 to 2.9 times. This is because, the company has inefficienctly utilized the fixed assets that resulted in a lower revenue generation.

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Chapter 10 Solutions

FINAN.ACCOUNTING-W/DGT ACCESS (LOOSE)

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