Question

The 2021 income statement of Adrian Express reports sales of $19,310,000, cost of goods sold of $12,250,000, and net income of $1,700,000. Balance sheet information is provided in the following table. ADRIAN EXPRESS Balance Sheets December 31, 2021 and 2020 2021 2020 Assets Current assets: Cash $ 700,000 $ 860,000 Accounts receivable 1,600,000 1,100,000 Inventory 2,000,000 1,500,000 Long-term assets 4,900,000 4,340,000 Total assets $ 9,200,000 $ 7,800,000 Liabilities and Stockholders' Equity Current liabilities $ 1,920,000 $ 1,760,000 Long-term liabilities 2,400,000 2,500,000 Common stock 1,900,000 1,900,000 Retained earnings 2,980,000 1,640,000 Total liabilities and stockholders' equity $ 9,200,000 $ 7,800,000 Industry averages for the following four risk ratios are as follows: Average collection period 25 days Average days in inventory 60 days Current ratio 2 to 1 Debt to equity ratio 50% Required: 1. Calculate the four risk ratios listed above for Adrian Express in 2021. (Use 365 days in a year. Round your answers to 1 decimal place.) 2. Do you think the company is more risky or less risky than the industry average

Answer 1

Answer:

1.

Average Collection Period = 25.2 Days

Average Days In Inventory = 52.1 days

Current Ratio = 2.2 to 1

Debt to Equity Ratio = 88.5%

2.

The above ratios shows that Adrian Express is more risky than the Industry Average due to Debt to Equity Ratio which is worse than 50% of Industry Average, although the rest 3 ratios are much closer to industry average.

Explanation:

$Average Collection Period =\frac{365}{Accounts Receivables Turnover Ratio}$

$Accounts Receivables Turnover Ratio = \frac{Net Credit Sales}{Average Accounts Receivables}\\\\Net Credit Sales = 19,310,000\\Accounts Receivables In 2021 = 1,600,000\\Accounts Receivables In 2020 = 1,100,000$

$Accounts Receivables Turnover Ratio = \frac{19310000}{\frac{1600000 + 1100000}{2} }\\Accounts Receivables Turnover Ratio = \frac{19310000}{1350000}\\Accounts Receivables Turnover Ratio = 14.30 times$

$Average Collection Period =\frac{365}{14.30 times}\\Average Collection Period = 25.52 days$

The Average Collection Period is greater than the market average hence worse.

$Average Days In Inventory = \frac{365}{Inventory Turnover}$

$Inventory Turnover = \frac{CostOfGoodsSold}{Average Inventories}$

$Inventory Turnover = \frac{12250000}{\frac{2000000 + 1500000}{2}}$

$Inventory Turnover = \frac{12250000}{1750000}$

$Inventory Turnover = 7 times$

$Average Days In Inventory = \frac{365}{7 times}$

$Average Days In Inventory = 52.14 days$

The Average Days in Inventory is less than the Industry average hence good.

$Current Ratio = \frac{Current Assets}{Current Liabilities}$

$Current Assets = Cash + Accounts Receivable + Inventory$

$Current Assets = 700,000 + 1,600,000 + 2,000,000$

$Current Assets = 4,300,000$

$Current Liabilities = 1,920,000$

$Current Ratio = \frac{4300000}{1920000}$

$Current Ratio = 2.24 to 1$

Current Ratio is greater than Industry Average hence the Adrian Express is risky.

$Debt To Equity Ratio = \frac{Total Liabilities}{Total Equity}$

$Total Liabilities = Current Liabilities + Long Term Liabilities\\Total Liabilities = 1,920,000 + 2,400,000\\Total Liabilities = 4,320,000$

$Total Equity = Common Stock + Retained Earnings\\Total Equity = 1,900,000 + 2,980,000\\Total Equity = 4,880,000$

$Debt To Equity Ratio = \frac{4320000}{4880000}$

$Debt To Equity Ratio = 88.5$%

Debt To Equity Ratio is greater than Industry Average, hence Adrian Express is risky as compared to Industry Average.