During 2018, Ambiance Company reported net revenue of $3,600,000. The company reported net fixed assets of $710,000 on January 1, 2018 and net fixed assets of $890,000 on December 31, 2018.Required:Part a. Calculate the fixed asset turnover ratio.Part b. Assume the 2018 fixed asset turnover ratio was lower than the 2017 ratio. Explain how an analyst might interpret this change.Part c. Describe at least one circumstance that might have caused the fixed asset turnover ratio to decline and be consistent with bad news.Part d. Describe at least one circumstance that might have caused the fixed asset turnover ratio to decline and yet be consistent with good news.

Question

What will be an ideal response?

Answer 1

Part a
Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets
= $3,600,000 ÷ [($710,000 + $890,000) ÷ 2] = 4.5

Part b
The fixed asset turnover ratio indicates how many dollars of revenue are generated for each dollar invested in fixed assets. A lower or declining ratio implies less efficient use of net fixed assets to generate revenue.

Part c (Note to instructor: Only one circumstance is required.)
On the negative side, the company may be experiencing a long-term decline in net revenue or a temporary drop in net revenue due to conditions beyond its control, such as the weather.

Part d (Note to instructor: Only one circumstance is required.)
On the positive side, the company may have just replaced older, low-valued equipment with expensive new equipment that is more efficient and will boost its revenues in the long-term. Or, the company may have recently acquired additional equipment in anticipation of greater future revenue or because of changes in the tax law.