Response to Classmates Discussions
BUS626 Week 3 - Discussion Forum 2
Responses
Below are two classmates with discussion that need response. They are Andrew Magistri and Lisa Schreiner
Andrew Magistri
Hi Everyone!
To properly calculate the average life and average age ratios for Six Flags, we must reflect onto their Consolidated balance sheet from their most recent (2019) 10-K filing.
PPE (Property, Plant, & Equipment) is referenced at 2,345,283,000 with accumulated depreciation of $1,061,287,000. When calculating the average life, we divide the PPE by the accumulated depreciation, leaving us with a ratio of 2.21 years.
Average age can be calculated using accumulated depreciation as referenced above at $1,061,287,000 divided by depreciation expense of $118,230,000 leaving the average age ratio of 8.98 years.
Finally, asset turnover ratio can be calculated using net sales of $1,487,583,000 divided by the average total assets of $2,882,540,000 giving a ratio of 0.52 or $0.52 annual return on every invested asset dollar.
The above ratios assist in giving context to the revenue documenting asset turnover ratio. A return of $0.52 in strictly revenue compared to a dollar of investment in assets is not impressive at its surface. Without context, it shows that the average total assets cost almost twice as much as the company is generating annually in net sales. When taking into account the average life and average age of these assets, it colors in our picture. Showing that these assets are designed with the intent on providing future far reaching income streams versus more immediate income during the current calendar year. Six Flags theme parks carry high overhead both in infrastructure and labor, leaving the company the need to think ahead in terms of revenue streams.
Accounts Receivable Turnover ratio can be calculated using net credit sales of 1,053,281,000 divided by the average accounts receivable of $108,679,000 giving a ratio of 9.69.
The ratio can be converted into days by dividing an assumed 360 day calendar period by the above accounts receivable turnover ratio of 9.69 leaving an assumed 37.15 day turnover ratio of accounts receivable.
This ratio when converted to days makes the suggestion that Six Flags turns over their accounts receivable into cash at a pace of roughly 37 days on average. Ideally, reducing that number would lead to more current cash and more time in the market for investing that cash for future company returns.
-Andrew
Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). https://www.cengage.com
Six Flags. (2020). Six Flags Annual Report. Retrieved from https://investors.sixflags.com: https://investors.sixflags.com/~/media/Files/S/SixFlags-IR/documents/annual-reports/six-2019-annual-report-v2.pdf
Lisa Schreiner
Property, Plant and Equipment (PPE) contains various assets depending on the type of business one is reviewing. Starbucks PPE includes Land, Building, Leasehold Improvements, Store Equipment, Roasting Equipment, and Furniture and Fixtures (Starbucks, 2020). Just over 50%, or $7.9M, Starbucks reflects for PPE is in Leasehold Improvements (Starbucks 2020). As Leasehold Improvements depreciate over extended periods of 20-30 years, it makes sense that Starbucks Asset average life is 11.76 years (Table 1). The average age of assets in the Starbucks Financial Statements is 6.46 years (Table 1). Comparing the average life of 11.76 years with the average age of 6.46 years, Starbucks should anticipate replacing older assets in the next five year. Preparation to invest in PPE includes increasing savings for liquidity, increasing profits through higher sales and lower cost of sales, and decreasing debt to secure loan approvals. Table 1 reflects the Asset Turnover Ratio for Starbucks at 1.22. This ratio indicates the value of revenue a company can generate for each dollar investment in a fixed asset. In this case, for every $1.00 Starbucks invests to purchase or extend the life of a fixed asset, the company can generate $1.22 in revenue. The higher the ratio, the more value assets contribute to the company in terms of sales.
Reviewing the Accounts Receivable Ratios for Starbucks was a bit of a challenge at first. According to Starbucks (2020), “We consider all highly liquid instruments with maturities of three months or less at the time of purchase, as well as credit card receivables for sales to customers in our company-operated stores that generally settle within two to five business days, to be cash equivalents” (p. 50). The Apple example in the text presumes all sales were on credit (Porter & Norton, 2018). Since most people do not carry cash, I am presuming all of Starbucks sales are on credit for these calculations. Table 1 reflects Starbucks AR Turnover Ratio is 33.72 and the number of days sales are in the AR balance is 10.68 indicating credit collections occur within about 11 days of sale. These figures are slightly skewed from Starbucks assumptions in the Financial Statements that credit sales settle within two to five business days but is a good reference point.
References
Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). https://www.cengage.com (Links to an external site.) (Links to an external site.)
Starbucks, Inc. (2020). 2019 Annual Report. https://investor.starbucks.com/financial-data/annual-reports/default.aspx