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XYZ Company had net sales of \$500,000 and COGS of \$320,000. If the beginning balance of Total Assets was \$300,000 and the ending balance in Total Assets was \$400,000, what is the Total Asset Turnover ratio?
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14. Financial Statement Analysis
Ratios: Total Asset Turnover
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What does a total asset turnover ratio of 1.5 times represent?
A
The company pays \$1.50 in interest for every \$1.00 of assets.
B
The company earns \$1.50 in net income for every \$1.00 of assets.
C
The company has \$1.50 in assets for every \$1.00 of sales.
D
The company generates \$1.50 in sales for every \$1.00 of assets.
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Step 1: Understand the concept of the total asset turnover ratio. It is a financial metric that measures how efficiently a company uses its assets to generate sales revenue. The formula for total asset turnover ratio is: .
Step 2: Analyze the given ratio of 1.5 times. This means that for every \$1.00 of total assets, the company generates \$1.50 in net sales revenue.
Step 3: Compare the provided options to the definition of the total asset turnover ratio. The correct interpretation aligns with the idea that the company generates \$1.50 in sales for every \$1.00 of assets.
Step 4: Eliminate incorrect options. For example, the ratio does not represent interest payments, net income, or the proportion of assets to sales. These interpretations do not match the formula or purpose of the total asset turnover ratio.
Step 5: Conclude that the correct answer is: 'The company generates \$1.50 in sales for every \$1.00 of assets,' as this accurately reflects the meaning of the total asset turnover ratio.
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