University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

450

Pages:

2
Author:

stud_ice13

Total Asset Turnover and Its Analysis Total Asset Turnover measures how efficiently a company uses its assets to generate sales, calculated as: Total Asset Turnover=Net Sales Average Total Assets Where: • • Net Sales: Revenue earned from sales of goods and services. Average Total Assets: Calculated as (Current PeriodEnd Total Assets+Prior Period-End Total Assets)/2 A higher total asset turnover suggests the company generates more revenue per dollar invested in assets. This metric helps assess asset efficiency and can indicate effective asset management by comparing a company's turnover rate over time or against industry averages. Example of Total Asset Turnover Application Consider Starbucks, with a total asset turnover of 1.22, which means Starbucks generated $1.22 in sales for every $1 of assets. For comparison, higher turnover ratios can be seen in labor-intensive industries, which typically require fewer physical assets (e.g., services), while capital-intensive industries (e.g., manufacturing) often have lower turnover due to significant investment in plant and equipment. Analyzing Total Asset Turnover Across Industries Comparing asset turnover between industries can lead to misleading interpretations: • • Capital-Intensive industries (like paper manufacturing) tend to have lower total asset turnover ratios due to high investments in fixed assets. Labor-Intensive industries (such as food service) often achieve higher turnover as they rely more on human resources than on substantial asset investments. In cases like the paper manufacturer example, comparing its 1.9 turnover with food stores or auto dealers does not yield meaningful insights. Instead, the paper company should benchmark against competitors within the same industry to set realistic performance expectations. Application to Tulsa Company Scenario (Comprehensive Asset and Expense Management) 1. Allocate Purchase Cost: Tulsa Company purchased assets totaling $600,000, which need to be allocated across land, building, machinery, and equipment based on each asset's fair value. 2. Calculate Depreciation: Use different depreciation methods based on asset type: • • • Land is not depreciated. Building and equipment typically use straight-line depreciation. Machinery may use units-of-production to match usage patterns. 3. Discarding Fully Depreciated Assets: • • Calculate the final year of straight-line depreciation. Record disposal entries, including loss if the asset's book value exceeds proceeds. 4. Patent Acquisition and Amortization: For intangible assets like patents: • • Record the purchase at cost. Amortize over the patent’s useful life (10 years in this case). 5. Natural Resource Depletion: For the ore deposit: • • Compute depletion per ton by dividing the total resource cost (minus salvage) by estimated tons. Journalize the depletion expense based on tons mined. These steps give Tulsa Company a clear picture of how to manage asset costs, recognize depreciation/amortization accurately, and assess the impact on financial performance over time.