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The 2018 income statement of Adrian Express reports sales of $15,015,000, cost o

ID: 2577071 • Letter: T

Question

The 2018 income statement of Adrian Express reports sales of $15,015,000, cost of goods sold of $8,863,500, and net income of $1,570,000. Balance sheet information is provided in the following table ADRIAN EXPRESS Balance Sheets December 31, 2018 and 2017 2018 2017 Assets Current assets Cash Accounts receivable $ 570,000 S 730,000 970,000 1,740,000 ,370,000 4,770,000 4,210,000 1,340,000 Long-term assets Total assets $8,420,000 $7,280,000 Liabilities and Stockholders' Equity Current liabilities $ 1,990,000 $1,630,000 2,270,000 2,370,000 1,940,000 ,940,000 2,220,000 1,340,000 Long-term liabilities Common stock Retained earnings Total liabilities and stockholders' equity $8,420,000 $7,280,000 Industry averages for the following four risk ratios are as follows Average collection period Average days in inventory Current ratio Debt to equity ratio 25 days 60 days 2 to 1 50% Required:

Explanation / Answer

Average collection period = 365 * Average receivables / Sales

= 365 * ((1340000 +970000)/2) / 15015000 = 28 days

Average days in inventory = 365 * Average inventory / Cost of goods sold

= 365 * ((1740000 +1370000) /2) / 8863500 = 64 days

Current ratio = (570000 + 1340000 + 1740000) / 1990000 = 1.83

Debt to equity ratio = 2270000 / (1940000 + 2220000) = 0.55

The trunover ratios are more or less in line with the industry average

However, on the basis of liquidity and solvency the company seems slightly risky in respect to the industry