Calculate the average life, average age, and asset turnover ratios. Discuss what each ratio tells you in the context of your chosen company.
T-Mobile uses the straight-line method of depreciation as this method gives a more accurate estimate of asset age (T-Mobile US Inc, 2022). The useful life of an asset, also known as economic life or service life, is an estimate of how long you can reasonably expect to use an asset for the benefit of your organization (Porter & Norton, 2018). It also tells you how long the asset will remain functional and generate income. The three ratios that are used for the purpose of monitoring depreciation are the average life ratio (ALR) which measures the average life of the asset. T-Mobile’s ALR is 7.95 years 95188/11967 (Property & Plant/Depreciation Expense).
The average age ratio for T-Mobile is 4.44 years 53102/11967 (Accumulated depreciation/Depreciation Expense).
The final ratio is the asset turnover ratio (ATR), which measures the number of assets needed for every dollar of sales. The ATR for T-Mobile is .380. ATR for the technology industry will typically be around 0.61. T-Mobile absorbed much of Sprint’s bad debt and technology and inventory that has phased out. The next fiscal year 2023 will see a slimmer wireless competitor with cutting-edge technology.
Calculate the accounts receivable turnover ratio and convert that ratio into days. Discuss what each ratio tells you in the context of your chosen company.
The accounts receivables turnover ratio (ARTR) measures the number of times a company collects its average accounts receivable balance. An efficient company has a higher accounts receivable turnover ratio while an inefficient company has a lower ratio. T-Mobile’s ARTR is 18.84, which is a good indication of how well T-Mobile collects its receivables. On average T-Mobile collects its receivables in 19 days on average.
Week 3 Discussion – Long-Term Asset and Accounts Receivable Analysis Case Study
Target Corporation – 2021 Annual Report
Average Life = Property, Plant, and Equipment/Depreciation Expense
Target Average Life Ratio: 49,384 million / 2,470 million = 19.99
Average Age = Accumulated Depreciation/Depreciation Expense
Target Average Age Ratio: 20,278 million / 2,470 million = 8.21
Asset Turnover = Net Sales/Average Total Assets
Target Asset Turnover Ratio: 93,561 million / 47,013.5 million = 1.99
The age and composition of long-term assets should be analyzed because of they are often the most productive assets of many companies. To help a corporation determine the average life of their long-term assets, the average life ratio can be determined by dividing property, plant and equipment by the depreciation expense. Additionally, to determine the average age of long-term assets, accumulated depreciation is divided by the depreciation expense. Finally, to determine how many dollars of assets are needed to every dollar of sales, the asset turnover ratio can be calculated by dividing net sales by average total assets (Porter & Norton, 2018).
In 2021, Target Corporation reported $49,384 million in property and equipment, $2,470 million in depreciation expense, $20,278 million in accumulated depreciation expense, $93,561 million in net sales and $47,013.5 million in average total assets. By using the calculations for each ratio, it is determined that Target Corporation’s the average life of their long-term assets is 19.99 years, the average age of their long-term assets is 8.21 years, and the asset turnover ratio is 1.99 – meaning that each dollar of assets produced $1.99 of sales. According to csimarket.com, the average asset turnover ratio in the retail industry was 1.77 (.
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Target Accounts Receivable Turnover Ratio: 93,561 million / 1,135 million = 82.43
Number of Days’ Sales in Receivables = Number of Days in the Period/Accounts Receivable Turnover Ratio
Target Number of Days’s Sales in Receivables: 360/82.43 = 4.37 days
By dividing Target’s net credit sales by their average accounts receivable, it was determined that Target’s accounts receivable turnover ratio was 82.43, meaning the company turns over its accounts receivable over 82 times per year. Dividing the number of days in the period by the accounts receivable turnover ratio tells investors that it took Target 4.37 days or less on average to collect its accounts receivable.
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