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
