Co.x-Beginning total assets of 250000 and ending total assets of 290000, The co.

has gross sales of

350000 for the year, besides they have 40 000 sales rrturns during year
Co Y -Begging assets 75000, Ending assets 850000, net sales 180000
Calculate Asset Turnover ratio of both Cos, and determine which one is more effici

Asset Turnover Ratio = Net Sales / Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
For Co.x:
Beginning Total Assets = $250,000
Ending Total Assets = $290,000
Net Sales = Gross Sales - Sales Returns = $350,000 - $40,000 = $310,000
Average Total Assets = ($250,000 + $290,000) / 2 = $270,000
Asset Turnover Ratio for Co.x = $310,000 / $270,000 = 1.148
For Co Y:
Beginning Total Assets = $75,000
Ending Total Assets = $85,000
Net Sales = $180,000
Average Total Assets = ($75,000 + $85,000) / 2 = $80,000
Asset Turnover Ratio for Co Y = $180,000 / $80,000 = 2.25

Co.x has an asset turnover ratio of approximately 1.148

Co Y has an asset turnover ratio of approximately 2.25
Since Co Y has a higher asset turnover ratio,

Financial ratios are essential tools used to evaluate a company’s financial health, performance,
and market position. These ratios provide meaningful insights by analyzing numerical values
from a company’s financial statements, including the balance sheet, income statement, and cash
flow statement. Let’s explore some key categories of financial ratios:
1. Liquidity Ratios:
o These ratios assess a company’s ability to meet short- and long-term obligations.
o Examples include:
 Current Ratio: Measures a company’s ability to pay off short-term
liabilities with current assets.
  Formula: Current ratio = Current assets / Current liabilities.
 Acid-Test Ratio (Quick Ratio): Evaluates a company’s ability to pay off
short-term liabilities using quick assets (excluding inventories).
 Formula: Acid-test ratio = (Current assets - Inventories) / Current
liabilities.
 Cash Ratio: Measures a company’s ability to pay off short-term liabilities
with cash and cash equivalents.
 Formula: Cash ratio = Cash and Cash equivalents / Current
liabilities.
 Operating Cash Flow Ratio: Indicates how many times a company can
pay off current liabilities using cash generated in a given period.
 Formula: Operating cash flow ratio = Operating cash flow /
Current liabilities.
2. Leverage Financial Ratios:
o These ratios evaluate the amount of capital derived from debt.
o They help assess a company’s debt levels.
o Examples include:
 Debt-to-Equity Ratio: Compares a company’s total debt to its equity.
 Debt Ratio: Measures the proportion of a company’s assets financed by
debt.
 Interest Coverage Ratio: Assesses a company’s ability to cover interest
payments with its operating income.
3. Efficiency Ratios:
o These ratios analyze how efficiently a company utilizes its assets and resources.
o Examples include:
 Inventory Turnover Ratio: Measures how quickly a company sells its
inventory.
 Accounts Receivable Turnover Ratio: Evaluates how efficiently a
company collects its receivables.
 Asset Turnover Ratio: Indicates how effectively a company uses its
assets to generate revenue.
4. Profitability Ratios:
o These ratios assess a company’s profitability.
o Examples include:
 Gross Profit Margin: Measures the percentage of revenue retained after
deducting the cost of goods sold.
 Net Profit Margin: Indicates the percentage of profit relative to total
revenue.
 Return on Assets (ROA): Measures how efficiently a company uses its
assets to generate profit.
5. Market Value Ratios:
o These ratios relate a company’s stock price to its financial performance.
o Examples include:
 Price-to-Earnings (P/E) Ratio: Compares a company’s stock price to its
earnings per share.
 Price-to-Book (P/B) Ratio: Compares a company’s stock price to its book
value per share.