Year 2 Year 1 Sales $86,060 $74,200 Total assets at the end of the year 63,800 68,600 Total assets at the beginning of the year 68,600 79,800 a. Determine the asset turnover for The ABC Depot for Year 2 and Year 1. Round to one decimal place.

Answer:

a. We have:

Year 2 asset turnover = 1.3 times

Year 1 asset turnover = 1.0 time

b. Since asset turnover of the ABC Depot increases from 1.0 time in Year 1 to 1.3 times in Year 2, these turnover therefore indicate that the ability of The ABC Depot to use its assets to generate sales more effectively has increased/improved.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

The ABC Depot reported the following data (in millions) in its recent financial statements:

                                                                               Year 2            Year 1

Sales                                                                    $86,060        $74,200

Total assets at the end of the year                      63,800          68,600

Total assets at the beginning of the year           68,600          79,800

a. Determine the asset turnover for The ABC Depot for Year 2 and Year 1. Round to one decimal place.

b.  What do these turnover indicate concerning the trend in the ability of The ABC Depot to effectively use its assets to generate sales?

The explanation of the answers is now provided as follows:

a. Determine the asset turnover for The ABC Depot for Year 2 and Year 1. Round to one decimal place.

The asset turnover can be calculated using the following formula:

Asset turnover = Sales / Average total assets ………………… (1)

Where:

Average total assets = (Total assets at the beginning of the year + Total assets at the end of the year) / 2

Using equation (1), we therefore have:

Year 2 asset turnover = $86,060 / (($68,600 + $63,800) / 2) = 1.3 times

Year 1 asset turnover = $74,200 / (($79,800 +$ 68,600) / 2) = 1.0 time

b.  What do these turnover indicate concerning the trend in the ability of The ABC Depot to effectively use its assets to generate sales?

A higher asset turnover indicates that a company is using its assets to generate sales more effectively.

Since asset turnover of the ABC Depot increases from 1.0 time in Year 1 to 1.3 times in Year 2, these turnover therefore indicate that the ability of The ABC Depot to use its assets to generate sales more effectively has increased/improved.

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