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me ?? ?? ?? ???? ?? ??? ?? ?? ?? ?? 14%(4) 6?6???6:43 23 a E D Chapter 12 ? ezto.mheducation.com/hm.tpx?-"0.354 1988 1834 12603_1528328514294 Search Textbook Solutions l C × Exercise 12-5 Evaluate risk ratios (LO12-3) of Adrian Express reports sales of $14,097,000, cost of goods sold of $8, 154,000, and net income of $1,540,000. Balance shoet information is provided in th following table ADRIAN EXPRESS Balance Sheets December 31, 2018 and 2017 2018 2017 Assets Current assets Cash Accounts receivable Inventory 540,000 $ 700,000 940,000 680,000 ,340,000 4,740,000 4,180,000 1,280,000 Long-term assets. Total assets 5 8,240,000 $7,160,000 Liabilities and Stockholders' Equity Current liabilities Long-term Sabilities Common stock Retained eamings 1,960,000 $1,600.000 2,240,000 2,340,000 880,000 1,880,000 2,160,000 ,340,000 Total liablaties and stockholders' equity $8,240,000 $7,160,000 industry averages for the following four risk ratios are as folows:Explanation / Answer
Solution 1:
Average collection period = Nos of days in a year / Accounts receivables turnover ratio
Accounts receivables turnover ratio = Credit sales / Average accounts receivables
Average accounts receivables = ($1,280,000 + $940,000)/2 = $1,110,000
Accounts receivables turnover = $14,097,000 / $1,110,000 = 12.7
Average collection period = 365 / 12.7 = 28.7 days
Average days in inventory = Nos of days in a year / Inventory turnover ratio
Inventory turnover ratio = Cost of goods sold / Average inventory
Average inventory = ($1,680,000 + $1,340,000) / 2 = $1,510,000
Inventory turnover ratio = $8,154,000 / $1,510,000 = 5.4
Average days in inventory = 365/5.4 = 67.6 days
Current ratio = Current Assets / Current Liabilities
Current assets = $540,000 + $1,280,000 + $1,680,000 = $3,500,000
Current liabilities = $1,960,000
Current ratio = $3,500,000 / $1,960,000 = 1.8 to 1
Debt to equity ratio = Total liabilties / Stockholder's equity = ($1,960,000 + $2,240,000) / ($1,880,000 + $2,160,000)
= 103.9%
Solution 2:
As all the ratio computed above is worse than industry standard, therefore company is more risky than the industry average.
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