Total revenue $82,189
Total assets at end of year 23,505
Total assets at beginning of year 23,126
a. Compute the ratio of net sales to assets. Round to two decimal places.
b. Tiffany & Co. is a large North American retailer of jewelry, with a ratio of net sales to assets of 0.85. Why would Tiffany’s ratio of net sales to assets be lower than that of Kroger?
Answer:
a. 3.53 {$82,189 ÷ [($23,505 + $23,126) ÷ 2]}
b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry using a much longer operating cycle than Kroger uses selling groceries. Thus, Kroger is able to generate $3.53 of sales for every dollar of assets. Tiffany, however, is only able to generate $0.85 in sales per dollar of assets. This difference is reasonable when one considers the sales rate for jewelry and the cost of holding jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its longer operating cycle, relative to groceries, with higher gross profits, relative to groceries.