Asset Turnover Ratios and QuickBooks 2012

Two different activity ratios can help manage your assets in QuickBooks 2012 — the fixed asset turnover ratio and the total assets turnover ratio. The fixed asset turnover ratio quantifies how efficiently a firm employs its fixed assets. Predictably, this financial ratio is most useful when a firm has a lot of fixed assets: real estate, equipment, and so forth.

The fixed asset turnover ratio uses the following formula:

sales/fixed assets
A Simple Balance Sheet
Assets
Cash $25,000
Inventory 25,000
Current assets $50,000
Fixed assets (net) 270,000
Total assets $320,000
Liabilities
Accounts payable $20,000
Loan payable 100,000
Owner’s equity
S. Nelson, capital 200,000
Total liabilities and owner’s equity $320,000
A Simple Income Statement
Sales revenue $150,000
Less: Cost of goods sold 30,000
Gross margin $120,000
Rent 5,000
Wages 50,000
Supplies 5,000
Total operating expenses 60,000
Operating income 60,000
Interest expense (10,000)
Net income $50,000

Based on the numbers supplied by the balance sheet shown and the income statement shown, you can calculate the following fixed asset turnover ratio:

$150,000/$270,000

This formula returns the value of 0.556. In a nutshell, this ratio says that this firm requires $270,000 of fixed assets to produce $150,000 of sales or, more specifically, that the firm produces sales equal to roughly 56 percent of its fixed assets.

As is the case with many of these financial ratios, no guideline exists that you can use to determine a good fixed asset turnover ratio. You compare your fixed asset turnover ratio with firms of a similar size in your industry.

The total assets turnover ratio also measures how efficiently you’re employing your assets. This ratio is probably more appropriate in the situation where a firm doesn’t have a lot of fixed assets, but the firm still wins or loses at the game of business based on how well the firm manages its assets.

The total assets turnover ratio formula is as follows:

sales/total assets

Here’s the formula that calculates the ratio by using the financial data from the tables. If the total sales equal $150,000 and the total assets equal $320,000, the following formula makes the calculation:

$150,000/$320,000

This formula returns the ratio of 0.469, which means that the firm generates sales equal to roughly 47 percent of its total assets.

The total assets turnover ratio that you calculate for your business can’t be compared with some external benchmark or standardized rule. You compare your ratio with the same ratio of similarly sized businesses in your industry.

Obviously, your main consideration is whether you’re efficiently using your assets to produce sales relative to your competitors. The more sales you can produce with a given level of assets, the better off your business is.

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