Exercise 12-5 Evaluate risk ratios (LO12-3) The 2018 income statement of Adrian
ID: 2586312 • Letter: E
Question
Exercise 12-5 Evaluate risk ratios (LO12-3) The 2018 income statement of Adrian Express reports sales of $15,960,000, cost of goods sold of $9,600,000, and net income of $1,600,000. Balance sheet information is provided in the ollowing table. ADRIAN EXPRESS Balance Sheels December 31, 2018 and 2017 2018 201 Curment assets: 600,000 760,000 1,400,000 1,000,000 800,000 1,400,000 4800,000 4,240,000 Accounts receivable Long-9erm assets Total assets S 8.600,000 $7.400,000 Liabilities and Stockholders' Equity Cument iabilities Long-torm labities 2.020,000 $1.660,000 2,300,000 2400.000 2,000,000 2000.000 2 280.000 340.000 Retained earmings Total labliies and stockholders equity $8,600,000 $7,400 000 Industry averages for t·folowing risk ratios are as follows Average collection period Average atysmemory 25 days 60 days Debt to 7Explanation / Answer
Average Accounts Receivable = (Opening + Closing) Accounts Receivable / 2
= (1,000,000 + 1,400,000) / 2
= 1,200,000
Accounts receivable Turnover ratio = Net credit sales / Average Accounts Receivable
= 15,960,000 /1,200,000
= 13.3 times
Average Collection period = Average Collection period = 365 days / Average Accounts Receivable
= 365 days / 13.3 times
Average Collection period = 27 days
Average Inventory = (Opening + Closing) Inventory / 2
= (1,400,000 + 1,800,000) / 2
= 1,600,000
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
= 9,600,000 / 1,600,000
= 6 Times
Average days in Inventory = 365 days / Inventory turnover ratio
= 365 days / 6 times
Average days in Inventory = 61 days
Current Ratio = Current Assets / Current Liabilities
= (Cash + Accounts Receivable + Inventory) / Current Liabilities
= (600,000 + 1,400,000 + 1,800,000) / 2,020,000
Current Ratio = 1.88 times
Debt-equity ratio =Debt / Equity *100
= Long term Liabilities / (common stock + Retain earning) *100
= 2,300,000 / (2,000,000 + 2,280,000) *100
Debt-equity ratio = 53.74%
Conclusion
Yes the investment in company is More Risky
Average collection is the period in which the company collect from its receivables and Industry days are 25 whereas company’s is 27 so it is bad for company that it is taking more days to collect from its receivables.
Average days in inventory means in how much time the company sells its inventory. Industry takes 60 days whereas company take 61 days, so it is bad for company that it is taking more days to sell its inventory.
Current ratio is less of the company in comparison to Industry so company needs to improve it.
Debt equity ratios is more of company in comparison to industry so company needs to improve that too.
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