Exercise 12-5 Evaluate risk ratios (LO12-3) The 2018 income statement of Adrian

Question

Exercise 12-5 Evaluate risk ratios (LO12-3) The 2018 income statement of Adrian Express reports sales of $14,706,000, cost of goods sold of $8,624,000, and net income of $1,560,000. Balance sheet information is provided in the following table. ADRIAN EXPRESS Balance Sheets December 31, 2018 and 2017 2018 2017 Assets Current assets: Cash $ 560,000 $ 720,000 Accounts receivable 1,320,000 960,000 Inventory 1,720,000 1,350,000 Long-term assets 4,760,000 4,200,000 Total assets $ 8,360,000 $7,240,000 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Common stock Retained earnings Total liabilities and stockholders' equity $ 1,980,000 S1,620,000 2,260,000 2,360,000 1,920,000 1,920,000 2,200,000 1,340,000 $8,380,000 $7,240,000 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: 1. Calculate the four risk ratios listed above for Adrian Express in 2018. (Use 365 days in a year. Round your answers to 1 decimal place.) Risk Ratios Average collection period Average days in inventory Current ratio Debt to equity ratio days days

Explanation / Answer

Calculation of average collection period for 2018 Average Collection period = 365 days / Receivable turnover ratio Receivable turnover ratio = Credit sales / Average Accounts Receivable Average Accounts Receivables = ($1320000 + $960000)/2 = $11,40,000 Receivable turnover ratio = $1,47,06,000/$11,40,000 = 12.90 Average Collection period = 365 days / 12.90 = 28.3 days Calculation of average days in inventory for 2018 Average days in Inventory = 365 days / Inventory Turnover ratio Inventory Turnover ratio = Cost of goods sold / Average Inventory Average Inventory = ($1720000 + $1360000)/2 = $15,40,000 Inventory Turnover ratio = $86,24,000 / $15,40,000 = 5.60 Average days in Inventory = 365 days / 5.60 = 65.2 days Calculation of Current Ratio for 2018 Current ratio = Current assets / Current liabilities Current assets for 2018 = Total assets - Long term assets = $8360000 - $4760000 = $36,00,000 Current Liabilities = $19,80,000 Current ratio = $36,00,000 / $19,80,000 = 1.8 Calculation of debt to equity ratio for 2018 Debt to equity ratio = Total Long term debt / Total Equity Total equity = Common stock + retained earnings = $1920000 + $2200000 = $41,20,000 Debt to equity ratio = $22,60,000 / $41,20,000 = 54.8%

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