[The following information applies to the questions displayed below.] Income sta
ID: 2533956 • Letter: #
Question
[The following information applies to the questions displayed below.]
Income statement and balance sheet data for The Athletic Attic are provided below.
Required:
1. Calculate the following risk ratios for 2018 and 2019: (Round your answers to 1 decimal place.)
2. Calculate the following profitability ratios for 2018 and 2019: (Round your answers to 1 decimal place.)
THE ATHLETIC ATTICIncome Statements
For the years ended December 31 2019 2018 Net sales $10,400,000 $8,900,000 Cost of goods sold 6,800,000 5,450,000 Gross profit 3,600,000 3,450,000 Expenses: Operating expenses 1,600,000 1,600,000 Depreciation expense 200,000 210,000 Interest expense 40,000 50,000 Income tax expense 400,000 360,000 Total expenses 2,220,000 2,220,000 Net income $1,360,000 $1,230,000
Balance Sheets
December 31 2019 2018 2017 Assets Current assets: Cash $ 225,000 $ 164,000 $ 214,000 Accounts receivable 990,000 790,000 810,000 Inventory 1,725,000 1,405,000 1,075,000 Supplies 130,000 110,000 85,000 Long-term assets: Equipment 1,100,000 1,150,000 1,150,000 Less: Accumulated depreciation (600,000) (420,000) (210,000) Total assets $3,570,000 $3,199,000 $3,124,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 175,000 $ 115,000 $ 91,000 Interest payable 4,000 0 5,000 Income tax payable 40,000 40,000 31,000 Long-term liabilities: Notes payable 500,000 600,000 600,000 Stockholders' equity: Common stock 600,000 700,000 700,000 Retained earnings 2,251,000 1,744,000 1,697,000 Total liabilities and stockholders’ equity $3,570,000 $3,199,000 $3,124,000
Explanation / Answer
1. Calculate the following risk ratios for 2018 and 2019
(a)Receivables turnover ratio
Receivables turnover ratio = Net Sales / Average Accounts Receivables
2018
= $8900000 / [ ($790000 + $810000) / 2 ]
= $8900000 / $800000
= 11.1 Times
2019
= $10400000 / [ ($990000 + $790000) / 2 ]
= $10400000 / $890000
= 11.7 Times
(b)Inventory turnover ratio
Inventory turnover ratio = Cost of goods sold / Average Inventory
2018
= $5450000/ [ ($1405000 + $1075000)/2]
=$5450000 / $1240000
= 4.4 Times
2019
= $6800000 / [ ($1725000 + $1405000)/2]
= $6800000 / $1575000
= 4.3 Times
(c)Current ratio
Current ratio = Total Current Assets / Total Current Liabilities
2018
= $2469000 / $155000
= 15.9
= 15.9 : 1
2019
= $3070000 / $219000
= 14.0
= 14.0 : 1
(d) Debt to equity ratio
Debt to equity ratio = Total Debt / Total Equity
2018
= [ $115000 + 40000 + 600000 ] / [700000 + 1744000 ]
= 30.9%
2019
= [ $175000 + 4000 + 40000+ 500000] / [ $600000 + 2251000 ]
= 25.2%
2. Calculate the following profitability ratios for 2018 and 2019
(a) Gross profit ratio
Gross profit ratio = [Gross Profit / Sales ]x 100
2018
= [$3450000 / 8900000 ] x 100
= 38.8%
2019
= [$3600000 / 10400000 ] x 100
= 34.6%
(b) Return on assets
Return on assets = [Net Income / Average Total Assets ] x 100
2018
= $1230000 / [ (3199000 + 3124000)/2 ] x 100
= 38.9%
2019
= $1360000 / [ (3570000 + 3199000)/2 ] x 100
= 40.2%
(c) Profit margin
Profit margin = [ Net Income / Sales ] x 100
2018
= [ $1230000 / $8900000 ] x 100
= 13.8%
2019
= [ $1360000 / $10400000 ] x 100
= 13.1%
(d) Asset turnover
Asset turnover = Sales / Average Total Assets
2018
= $8900000 / [ (3199000 + 3124000)/2 ]
= 2.8 Times
2019
= $10400000 / [ (3570000 + 3199000)/2 ]
= 3.1 Times
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