Unit 2: Financial Statement: A Review

Lesson 2.4
Financial Ratios: E ciency
Contents
Introduction 1

Learning Objectives 2

Quick Look 3

Learn the Basics 4

E ciency Ratios 4
Significance and Uses of E ciency Ratios 4
Limitations of E ciency Ratios 6
Types of E ciency Ratios 7
Analysis and Interpretation of E ciency Ratios 9
Accounts Receivable Turnover Ratio 9
Inventory Turnover Ratio 11
Fixed Asset Turnover Ratio 12
Total Asset Turnover Ratio 13
Working Capital Turnover Ratio 14

Case Study 16

Keep in Mind 17

Try This 18

Practice Your Skills 19

Challenge Yourself 21

Photo Credits 22

Bibliography 22

Appendix 23
Statement of Comprehensive Income and Financial Position 23

2.4. Financial Ratios: Efficiency

Unit 2: Financial Statement: A Review

Lesson 2.4

Financial Ratios: E ciency

Introduction

By now, you have already learned that it is vital for businesses to generate profit. Similar to
the importance of blood in the human body, profit is essential to keep the business alive.
Without it, the business stops operating, which could then lead to closure. Companies,
regardless of size, need profits for their operations to continue. Thus, financial management
takes a crucial role in attaining this goal.

Good financial management results in profitability1 and wealth maximization. One aspect to
consider when aiming for profitability is the efficient use of the firm’s resources. A business
is said to be efficient when it is able to produce products at a minimum cost, without
wasting resources or assets, and still generates profit. In some instances, firms prefer to
adopt technological advancement to improve business efficiency, increase productivity, and
gain a competitive advantage in their field.

1
profitability (noun) - This refers to the ability to generate income.

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Unit 2: Financial Statement: A Review

Companies also hire financial managers to identify the most effective way to utilize their
resources without compensating much of their earnings. Most of the time, financial
managers use financial ratios to analyze and evaluate business efficiency. In this learning
material, you will be able to solve, analyze, and interpret financial ratios that aid financial
managers to create sound decisions in terms of business efficiency.

Learning Objectives DepEd Competency

At the end of this lesson, you should be able to Define the measurement levels, namely,
liquidity, solvency, stability, and profitability
do the following:
(ABM_BF12-IIIb-7).
● Explain the definition, uses, and
limitations of efficiency ratios.
● Enumerate the common efficiency ratios
used by businesses.
● Perform financial ratio analysis using the
efficiency ratios.
● Interpret the efficiency ratios as applied
in a simple business case.

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Unit 2: Financial Statement: A Review

Quick Look

Resource Efficiency
In economics, you have learned that there are limited resources available in an environment
that you must properly allocate and manage to produce goods and services for people’s
satisfaction. The utilization and maximization of these resources is a challenge for those
who aim for efficiency.

Efficiency is always associated with productivity. An increase in efficiency level results in an

increase in productivity. Naturally, when you want to be productive, you want to gather all
the possible resources around you and create something out of it at the soonest time. For
businesses, they want to produce products without wasting resources, time, and effort to
generate more income (Spacey 2018). This is called resource efficiency. Oftentimes, this is
also the reason why companies seek people who can work under pressure and produce
more.

Questions to Ponder
1. What do you think is the most important business resource or asset of value? Explain
your answer.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
2. What could possibly happen if a business does not seek efficiency?

__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

3. How can you measure the resource efficiency of a business?

__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

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Unit 2: Financial Statement: A Review

Learn the Basics

Cash2 is considered the most liquid asset of any business. It is also considered the most
important financial resource because it is readily available for use. Without cash, a business
cannot fully operate. Hence, other assets like accounts receivable3 and inventories4 must be
converted into cash to maximize the use of resources. Additionally, the adequacy of working
capital5 must also be considered in evaluating business efficiency.

Essential Question

Is the use of efficiency ratio always good for business?

Efficiency Ratios
An efficiency ratio is a financial ratio used that measures the ability of a business to utilize
its assets to generate profit (Kenton 2021). Typically, a company’s management team uses
financial ratio6 to analyze and evaluate the company’s performance in terms of its
management activities. These management activities include the utilization and
maximization of assets such as accounts receivables, inventories, and fixed assets7. Thus,
efficiency ratio is also referred to as an activity ratio or management ratio. Firms with good
management ratios efficiently use their resources at low cost while keeping their net income
high (Cabrera 2015, 225).

Significance and Uses of Efficiency Ratios

Interested parties always seek information to determine how well businesses are doing.
These interested parties may be investors, creditors, customers, and even employees. They
examine financial ratios to assess the financial position and strength of a business based on
the quantities presented in the financial statements.
Efficiency ratios give interested parties an idea of how a company uses its resources to gain

2
cash (noun) - These are bills and coins owned by the business.
3
accounts receivable (noun) - This refers to the claim of payment from another party.
4
inventory (noun) - These are goods held for sale.
5
working capital (noun) - This is the difference between current assets and current liabilities.
6
financial ratio (noun) - This is the numerical value one gets from comparing accounting items from financial statements.
7
fixed assets (noun)- These are tangible assets that companies hold on a long-term basis.

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Unit 2: Financial Statement: A Review

profit (Cabrera 2015, 225). Specifically, efficiency ratios are used to evaluate the
credit-collection policies, the management of buying and selling inventories, the efficiency of
the company in meeting its obligations, the activities involved in maintaining working capital,
and the utilization of long-term or fixed assets to meet its operating requirements.

Here are some of the uses of efficiency ratios:

a) Investors use efficiency ratios to determine how a firm manages its operational cash
flows, which is also a sign of profitability. This could imply a good return on
investment.
b) Efficiency ratios present the ability of a firm to collect receivables from its customers,
which could indicate that there is cash available to pay its creditors.
c) Efficiency ratios also indicate that there are enough sales to buy new inventories to be
sold to customers.
d) Efficiency ratios measure the level of efficiency of the management of the firm.

Figure 1. Efficient collection of receivables is crucial in ensuring that there is enough cash to buy
inventories and pay obligations.

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Unit 2: Financial Statement: A Review

Limitations of Efficiency Ratios

Financial ratios are powerful indicators of the financial performance and health of a business
entity. No financial ratio is more important than the others. All financial ratios mean
something, and they are interconnected with one another.

Although efficiency ratios are used to measure a firm’s performance in terms of utilization of
its assets, there are also limitations that must be considered, such as the following (Cabrera
2015, 224):
1. There is a lack of consistency in the application of accounting principles and
standards. While there are generally accepted accounting principles, the use of these
principles and standards still vary depending on the business industry.
2. Comparison of efficiency ratios is only useful when comparing similar businesses in
the same industry.
3. Efficiency ratios are not absolute measures in all areas of a company’s management
performance. These ratios only indicate the level of efficiency of asset management.

Closer Look

Selling Low-Profit Stocks in Large Quantities

Efficiency or activity ratios are interconnected with profitability ratios.
Firms that properly manage their assets increase their level of
profitability. Just recently, one of the largest retail companies in the world
opened its branch here in the Philippines. One of the reasons for it being
known worldwide is its ability to sell low-profit stocks in large quantities.
This means that it is able to create profit by efficiently utilizing its
resources.

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Unit 2: Financial Statement: A Review

Check Your Progress

1. How are efficiency ratios used by interested parties in evaluating a

firm’s performance?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

2. Why are efficiency ratios useful only when comparing similar

businesses in the same industry?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Types of Efficiency Ratios

Interested parties examine various ratios to assess a firm’s resource efficiency. These ratios
are presented with the corresponding definition and formula in Table 1.

Table 1 Types of Efficiency Ratios

Efficiency Ratios Function Formula

Accounts ● It measures how many times a

Receivable company can collect cash from
Turnover Ratio its receivables in a year.
● The average collection period
measures how long a company
can collect credit in a year.

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Unit 2: Financial Statement: A Review

● It estimates how many times a

firm buys and sells its
inventories.
Inventory
● The average sale period
Turnover Ratio
determines the number of days
the firm can sell its inventories
in a year.

● This ratio assesses a

Fixed Asset management’s efficiency in
Turnover Ratio generating sales using its fixed
assets.

● Similar to the fixed asset

turnover ratio, this ratio
Total Asset assesses the efficiency of a
Turnover Ratio management in terms of
generating sales using all its
assets.

Working Capital ● It measures the adequacy and

Turnover Ratio activity of the working capital.

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Unit 2: Financial Statement: A Review

Analysis and Interpretation of Efficiency Ratios

Now that you are familiar with the definition and function of efficiency ratios, you may now
examine the following illustrative case to learn how to calculate, analyze, and interpret these
ratios. For the succeeding section, refer to the Statement of Financial Position and Statement
of Financial Income shown in Appendix.

Accounts Receivable Turnover Ratio

Based on the information from Benny Enterprise in Appendix, what is the accounts
receivable turnover ratio for the year 2020?

Step 1: Determine the given relevant information and values.

net sales for the year 2020 ₱450,000
accounts receivable, beginning ₱150,000
accounts receivable, ending ₱130,000

To get the accounts receivable turnover ratio, we must take the two balances of
accounts receivable (the beginning and ending balance) and compute the average
balance. The beginning balance of an account is the ending balance of the previous
period. Since we are trying to solve the accounts receivable turnover ratio for 2020,
the beginning balance of accounts receivable is the year-end balance in 2019.
Hence, in this case, the beginning balance is ₱150,000, and the ending balance is
₱130,000.

Step 2: Determine what is asked.

The unknown is the accounts receivable turnover ratio for the year 2020.

Step 3: Provide the formula.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
accounts receivable turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑏𝑎𝑙𝑎𝑛𝑐𝑒

365 𝑑𝑎𝑦𝑠
average collection period =
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

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Unit 2: Financial Statement: A Review

Although the accounts receivable turnover ratio is the only unknown, we might as
well solve for the average collection period to determine how many days the
company takes to collect the receivables from their customers.

Step 4: Show your solution in computing for the unknown.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
accounts receivable turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
₱450,000
= ₱150,000 + ₱130,000
2

accounts receivable turnover ratio = 3.21 times

365 𝑑𝑎𝑦𝑠
average collection period =
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
365 𝑑𝑎𝑦𝑠
=
3.21
average collection period = 113.56 or 114 days

When we are talking about days, it should be converted into a whole number. In this
case, the 113.56 days must be rounded up to 114 days.

Step 5: Interpret your answer.

From the information given, it is found out that Benny Enterprise is able to
collect receivables from its customers 3.21 times in a year or every 114 days.
This may indicate that the firm is lenient to its credit policies and is not efficient
in collecting obligations from the customers.

Generally, a high accounts receivable turnover ratio is favorable because it indicates

that the receivables are converted into cash that will be used for business
operations. The ideal accounts receivable turnover ratio should be higher than 10
times, or the firm should be able to collect every 36 to 37 days.

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Unit 2: Financial Statement: A Review

Inventory Turnover Ratio

Based on the information given, what is the inventory turnover ratio of Benny Enterprise for
the year 2020?

Step 1: Determine the given relevant information and values.

cost of goods sold for the year 2020 ₱230,000
inventory, beginning balance ₱25,600
inventory, ending balance ₱21,200

The beginning balance of inventory is taken from the ending balance as of

December 31, 2019, which is ₱25,600. It has the same concept in getting the
beginning balance of accounts receivable.

Step 2: Determine what is asked.

The unknown is the inventory turnover ratio for the year 2020.

Step 3: Provide the formula.

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
inventory turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒

365 𝑑𝑎𝑦𝑠
average sale period =
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜

Similar to the accounts receivable turnover ratio, it is best to solve for the average
sale period to determine how many days it did take for a company to sell its
inventories in a year.

Step 4: Show your solution in computing for the unknown.

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
inventory turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
₱230,000
= ₱25,600 + ₱21,200
2

inventory turnover ratio = 9.83 times

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Unit 2: Financial Statement: A Review

365 𝑑𝑎𝑦𝑠
average sale period =
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜
365 𝑑𝑎𝑦𝑠
=
9.83
average sale period = 37.13 or 37 days

Since we are talking about days, we should still get the whole number of the average
sale period. But unlike in the average collection period, 37.13 was rounded down to
37 days.

Step 5: Interpret your answer.

With the inventory turnover ratio of 9.83 times, it can be concluded that Benny
Enterprise was able to sell goods and replace them with new stocks 9.83 times
in a year. In addition, the business can sell its goods every 37 days, which
implies good inventory management.

In general, the higher the inventory turnover ratio, the better it is for a business. It
only implies that a business is able to generate more income because it is able to
sell at a fast rate. When the inventory turnover is low, this indicates that there are
fewer sales. The ideal inventory turnover ratio depends on the nature of a business.

Fixed Asset Turnover Ratio

What is the fixed asset turnover ratio of Benny Enterprise for the year 2020?

Step 1: Determine the given.

net sales for the year 2020 ₱450,000
fixed asset, beginning balance ₱87,400
(land of ₱50,000 + NBV of building ₱37,400)
fixed asset, ending balance ₱78,200
(land of ₱40,000 + NBV of building ₱38,200)

The net book value (NBV) means that the depreciation was already taken into
account and that it has already been deducted from the building’s cost.

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Unit 2: Financial Statement: A Review

Step 2: Determine what is asked.

The unknown is the fixed asset turnover ratio for 2020.

Step 3: Provide the formula.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
fixed asset turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

Step 4: Show your solution in computing for the unknown.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
fixed asset turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
₱450,000
= ₱87,400 + ₱78,200
2

= 5.43 times
Step 5: Interpret your answer.
Benny Enterprise’s fixed asset turnover ratio is 5.43 times. This means that the
business efficiently used its fixed assets to create outputs 5.43 times in a year.

Total Asset Turnover Ratio

What is the total asset turnover ratio of Benny Enterprise for the year 2020?

Step 1: Determine the given.

net sales for the year 2020 ₱450,000
total assets for the year 2019 ₱341,400
total assets for the year 2020 ₱311,200

Step 2: Determine what is asked.

The unknown is the total asset turnover ratio for the year 2020.

Step 3: Provide the formula.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
total asset turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

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Unit 2: Financial Statement: A Review

Step 4: Show your solution in computing for the unknown.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
total asset turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
₱450,000
= ₱341,400 + ₱311,200
2

= 1.38 times

Step 5: Interpret your answer.

The total asset turnover ratio of Benny Enterprise is 1.38 times. This means
that the firm could efficiently use all its assets 1.38 times only in a year.

When the total assets turnover ratio is low relative to its industry, it may imply that a
firm is heavily invested in different assets but did not maximize the use of these
resources because it did not improve or increase its sales.

Working Capital Turnover Ratio

Lastly, what is the working capital turnover ratio of Benny Enterprise for the year 2020?

Step 1: Determine the given.

net sales for the year 2020 ₱450,000
working capital for 2019 (current assets of ₱239,000 ₱156,300
less current liabilities of ₱82,700)
working capital for 2020 (current assets of ₱219,000 ₱124,100
less current liabilities of ₱94,900)

Step 2: Determine what is asked.

The unknown is the working capital turnover ratio for the year 2020.

Step 3: Provide the formula.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
working capital turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

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Unit 2: Financial Statement: A Review

Step 4: Show your solution in computing for the unknown.

𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
working capital turnover ratio =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
₱450,000
= ₱156,300 + ₱124,100
2

= 3.21 times
Step 5: Interpret your answer.
The working capital turnover ratio of Benny Enterprise is 3.21 times. This
implies that the working capital is being recirculated 3.21 times in a year to
generate more income.

Check Your Progress

1. Why do assets or resources, like accounts receivables and

inventories, of the business need to be converted into cash?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

2. What does a high inventory turnover ratio imply?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

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Case Study

The Case of Motorola

One of the most successful companies known for making e-solutions and
communication products is Motorola. The first ever Motorola cellular
phone was released way back in the early 1980s. When the
telecommunications industry boomed, Nokia became the market leader,
followed by Motorola.

Efficiency ratios are much appreciated when there is a comparison

among businesses in the same industry. In the case of Motorola, a study
was conducted in 2010 to determine its 2002 financial ratios as compared
to the financial ratios of the semiconductor and telecommunications
industries. These financial ratios include liquidity, solvency, efficiency, and
profitability ratios. In this study, it was found out that the average
collection period of Motorola was 61 days, while it was 50 days and 73
days for the semiconductor industry and telecommunications industry,
respectively. The inventory turnover ratio of Motorola was 6.25, which
was higher compared to both industries.

What do these financial ratios imply? The results suggested that the firm
should evaluate its credit-collection policies, especially since it takes them
two months to convert receivables into cash. Also, it was recommended
that they monitor their sales since the inventory turnover is higher than
the firms in the same industries, resulting in a net loss for the company.

An Example of Financial Ratio Analysis: The Case of

Motorola
Henry W. Collier, et. al., “An Example of Financial Ratio
Analysis,” Journal of Business Case Studies 6, no. 4 (Clute
Journals, July/August 2010), last accessed on November 21,
2021,
https://clutejournals.com/index.php/JBCS/article/download/88
7/871/3499.

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Keep in Mind

● Efficiency is vital in ensuring profit and wealth maximization. Efficiency ratios are
used to measure the ability of a business to maximize the use of its assets and
generate profit. These ratios are also known as activity ratios or management ratios.
● The different efficiency ratios are as follows:

● Accounts receivable turnover ratio measures how many times a company is able to
collect cash from its receivables in a year. It is also best to compute the average
collection period to determine the days a company spends collecting these
receivables.
● The inventory turnover ratio measures how many times a firm buys and sells its
inventories in a year. The average sale period also determines how many days a firm
can sell its inventories.
● The fixed asset turnover ratio assesses a management’s efficiency in generating
sales using its fixed assets, while the total asset turnover ratio assesses the
efficiency of a management in generating sales using all its assets.
● The working capital turnover ratio measures the adequacy and activity of the
working capital.

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Unit 2: Financial Statement: A Review

Try This

A. Short-Answer Response (Identification). Write the correct answer on the provided

space before each number.

________________ 1. What financial ratio is also known as activity or management

ratio?

________________ 2. What do you call the difference between current assets and
current liabilities?

________________ 3. What is the most liquid asset?

________________ 4. What are the goods held by the business for sale?

________________ 5. What efficiency ratio measures how many times a company is

able to collect cash from its receivables in a year?

B. True or False. Write true if the statement is correct. Otherwise, write false.

________________ 1. Financial ratios are indicators of the financial performance and

health of a business entity.

________________ 2. Comparison of efficiency ratios can be used when comparing

similar businesses, even in different industries.

________________ 3. Efficiency ratios measure the level of efficiency of the

management of a firm.

________________ 4. Efficiency ratios are absolute measures in all areas of a

company’s management performance.

________________ 5. A high inventory turnover ratio is favorable for any firm

because it means that it is able to sell goods to generate more
income.

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Unit 2: Financial Statement: A Review

Practice Your Skills

Exploring E ciency Ratios

Answer the following questions in three-five sentences.

1. If you were to become a financial manager someday, how would you ensure the
resource efficiency of the company you will be working in to guarantee that wealth
maximization is also achieved?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

2. ABC Enterprise is a new firm in the food and beverage industry. The owner of this
firm tasked you to be the financial manager and look for the average efficiency ratios
of the industry. Do you think that there are benefits of using financial-ratio analysis
as a tool for benchmarking? If yes, what could be these benefits?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

For numbers 3-5, refer to this statement:

You were hired to analyze the efficiency ratios of FED Bookstore with the following
information for the year 2020:

accounts receivable turnover ratio 6.7

inventory turnover ratio 4.5
total assets turnover ratio 2.3

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Unit 2: Financial Statement: A Review

3. Based on these efficiency ratios, do you think that FED Bookstore is efficient
concerning its credit collection? Why so?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
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4. How long does it take for FED Bookstore to sell its books? Based on this, do you think
that the firm is efficient as to its inventory turnover? Explain your answer.
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5. Considering the total asset turnover ratio, are there any problems encountered by
the firm in terms of the utilization of its assets to obtain income? What might be
these problems?
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2.4. Financial Ratios: Efficiency 20

Unit 2: Financial Statement: A Review

Challenge Yourself

Answer the following questions concisely.

1. How will you educate a grocery-store owner about the importance of inventory
turnover ratio in his/her business?
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2. How can you apply the accounts receivable turnover ratio in your life as an
individual? You may cite your own experiences.
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3. Can efficiency ratios be used as a tool in evaluating the financial performance of a

country or nation? Explain your answer.
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2.4. Financial Ratios: Efficiency 21

Unit 2: Financial Statement: A Review

Photo Credits
Productivity, by geralt is free to use under the Pixabay license via Pixabay.com.

Invoice cash payment, by Mohamed Hassan is free to use under the Pixabay license via
Pixabay.com.

Bibliography

Cabrera, Ma. Elenita B. Financial Management: Principles and Applications. Manila, Philippines:
GIC Enterprises & Co., Inc., 2015.

Henry W. Collier, et. al. “An Example of Financial Ratio Analysis.” Journal of Business Case
Studies 6, no. 4 (July/August 2010).
https://clutejournals.com/index.php/JBCS/article/download/887/871/3499.

Kenton, Will. Investopedia. “Efficiency Ratio Definition.” Last modified on May 7, 2021.
https://www.investopedia.com/terms/e/efficiencyratio.asp.

Lucas, John A. “Learning Efficiency of Students in Varying Environments.” The Journal of

Experimental Education 39, no. 1 (Fall 1970): 63-68.
https://www.jstor.org/stable/20157156.

Spacey, John. Simplicable. “6 Examples of Management Efficiency.” Last modified on March

10, 2018. https://simplicable.com/new/management-efficiency.

2.4. Financial Ratios: Efficiency 22

Unit 2: Financial Statement: A Review

Appendix
Statement of Comprehensive Income and Financial Position

Benny Enterprise
Statement of Comprehensive Income
For the Years Ended December 31, 2019 and 2020

2019 2020
Net Sales 500,000.00 450,000.00
Less: Cost of Goods Sold 316,000.00 230,000.00
Gross Profit ₱ 184,000.00 220,000.00
Less: Operating Expense
Selling Expenses 64,000.00 43,000.00
Administrative Expenses 10,000.00 17,000.00
Net Income ₱ 110,000.00 160,000.00

Benny Enterprise
Statement of Financial Position
As of December 31, 2019 and 2020

December 31, 2019 December 31, 2020

Current Assets
Cash ₱ 45,000.00 43,000.00
Accounts Receivable 150,000.00 130,000.00
Marketable Securities 2,500.00 7,500.00
Inventories 25,600.00 21,200.00
Supplies 3,800.00 3,000.00
Prepayments 12,100.00 14,300.00
₱ 239,000.00 219,000.00

Noncurrent Assets
Land ₱ 50,000.00 40,000.00
Building, net 37,400.00 38,200.00
Intangible Assets 15,000.00 14,000.00

2.4. Financial Ratios: Efficiency 23

Unit 2: Financial Statement: A Review

102,400.00 92,200.00

TOTAL ASSETS ₱ 341,000.00 311,200.00

Current Liabilities
Accounts Payable ₱ 35,000.00 40,000.00
Notes Payable 12,700.00 21,900.00
Wages Payable 20,000.00 18,000.00
Rent Payable 15,000.00 15,000.00
82,700.00 94,900.00
Noncurrent Liabilities
Long-term notes payable 16,300.00 11,100.00

TOTAL LIABILITIES ₱ 99,000.00 106,000.00

Owner’s equity
Benny, Capital 242,400.00 205,200.00

TOTAL LIABILITIES AND EQUITY ₱ 341,000.00 311,200.00

2.4. Financial Ratios: Efficiency 24