Question

Exercise 12-7 Calculate risk ratios (LO12-3)

The balance sheets for Plasma Screens Corporation and additional information are provided below.



PLASMA SCREENS CORPORATION
Balance Sheets
December 31, 2018 and 2017
2018 2017
Assets
Current assets:
Cash $ 151,300 $ 117,000
Accounts receivable 72,000 89,000
Inventory 92,000 77,000
Investments 3,700 1,700
Long-term assets:
Land 450,000 450,000
Equipment 760,000 640,000
Less: Accumulated depreciation (398,000) (238,000)
Total assets $ 1,131,000 $ 1,136,700
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 96,000 $ 82,000
Interest payable 6,000 11,700
Income tax payable 8,000 4,700
Long-term liabilities:
Notes payable 110,000 220,000
Stockholders' equity:
Common stock 670,000 670,000
Retained earnings 241,000 148,300
Total liabilities and stockholders' equity $ 1,131,000 $ 1,136,700


Additional information for 2018:

1. Net income is $92,700.

2. Sales on account are $1,416,800.

3. Cost of goods sold is $1,098,500.


Required:

1. Calculate the following risk ratios for 2018: (Round your answers to 1 decimal place.)

Reciveables turnover Ratio, Inventory turnover ratio, current ratio, Acid-Test ratio, Debt-equity Ratio

Answer 1

Answer and Explanation:

The formula and the computation of the following risk ratios are shown below:

a. Account receivable turnover ratio = Net credit sales ÷ Average accounts receivable

where,

Net credit sales is $1,416,800

And, the Average accounts receivable would be

= (Accounts receivable, beginning of year + Accounts receivable, end of year) ÷ 2

= ($89,000 + $72,000) ÷ 2

= $80,500

So, the accounts receivable turnover ratio would be

= $1,416,800 ÷ $80,500

= 17.6 times

b. Inventory turnover ratio = Cost of goods sold ÷ Average inventory

where,

Cost of goods sold is $1,098,500

And, the Average inventory would be

= (Inventory, beginning of year + Inventory, end of year) ÷ 2

= ($77,000 + $92,000) ÷ 2

= $84,500

So, the inventory turnover ratio would be

= $1,098,500 ÷ $84,500

= 13 times

c. Current ratio = Current assets ÷ Current liabilities

where,

Current assets

= Cash + account receivable + inventory + investments

= $151,300 + $72,000 + $92,000 + $3,700

= $319,000

And, the current liabilities is

= Account payable + interest payable + income tax payable

= $96,000 + $6,000 + $8,000

= $110,000

So, the current ratio is

= $319,000 ÷ $110,000

= 2.90 times

d. Acid test ratio = Quick assets ÷ Current liabilities

where,

Current assets

= Cash + account receivable + investments

= $151,300 + $72,000 + $3,700

= $227,000

And, the current liabilities is

= Account payable + interest payable + income tax payable

= $96,000 + $6,000 + $8,000

= $110,000

So, the current ratio is

= $227,000 ÷ $110,000

= 2.06 times

e. Debt equity ratio = (Total debt ÷ Shareholders’ Equity)

where,

Total debt = Total current liabilities + Long-term liabilities

= $110,000 + $110,000

= $220,000

And, the Shareholders’ equity is $670,000 + $241,000 = $911,000

So, the debt equity ratio is

= $220,000 ÷ $911,000

= 0.24 times

We simply applied the above formulas