At December 31, 2018 and 2017, respectively, Tyler Industries reported land, buildings, and equipment totaling $5,655,000 and $2,152,000 along with Accumulated Depreciation of $1,000,000 and $600,000 on its balance sheets. Revenues amounted to $38,227,000 and $12,113,000 for 2018 and 2017, respectively.Required:Part a. Compute Tyler's fixed asset turnover ratio for the year ended December 31, 2018.Part b. Assume that Tyler's fixed asset turnover ratio increased from 2017 to 2018. How might an analyst interpret an increasing ratio?Part c. Alternatively, assume that Tyler's fixed asset turnover rate decreased. Does a declining ratio always indicate a negative trend?

Question

What will be an ideal response?

Answer 1

Part a
Average net fixed assets = (Beginning fixed assets balance + Ending fixed asset balance) ÷ 2
= [($5,655,000 ? $1,000,000) + ($2,152,000 ? $600,000)] ÷ 2 = $3,103,500
Fixed asset turnover = Sales revenues ÷ Average net fixed assets
= $38,227,000 ÷ $3,103,500 = 12.3

Part b
The fixed asset turnover ratio indicates how many dollars of revenue are generated for each dollar invested in fixed assets. The company generated $12.30 of net revenues for each dollar invested in average net fixed assets. An increasing fixed asset turnover rate suggests more efficient fixed asset use.

Part c
The decline in the fixed asset turnover ratio can be consistent with either bad news or good news. A bad news scenario would exist if the declining fixed asset ratio was consistent with a long-term decline in net revenue or a temporary drop in net revenue due to conditions beyond a company's control, such as the weather. A good news scenario would exist if the declining fixed asset turnover ratio indicated that the company was expanding production that required the acquisition of additional expensive and more efficient productive assets required for higher net revenue opportunities in the future or possibly to take advantage of changes in the tax law.