Income statement and balance sheet data for The Sports Shack are provided below.
ID: 2526389 • Letter: I
Question
Income statement and balance sheet data for The Sports Shack are provided below.
The Sports Shack
Income Statements
For the years ended December 31
2019
2018
Sales revenue
$8,200,000
$6,600,000
Cost of goods sold
6,100,000
4,700,000
Gross profit
2,100,000
1,900,000
Expenses:
Operating expenses
1,450,000
1,400,000
Depreciation expense
90,000
100,000
Interest expense
25,000
50,000
Income tax expense
95,000
80,000
Total expenses
1,660,000
1,630,000
Net income
$440,000
$270,000
The Sports Shack
Balance Sheets
December 31
Assets
2019
2018
2017
Current assets:
Cash
$290,000
$218,000
$196,000
Accounts receivable
1,050,000
680,000
880,000
Inventory
919,000
1,250,000
1,100,000
Supplies
80,000
90,000
65,000
Long-term assets:
Equipment
1,100,000
1,200,000
900,000
Accumulated depreciation
(440,000)
(350,000)
(250,000)
Total assets
$2,999,000
$3,088,000
$2,891,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$50,000
$65,000
$55,000
Interest payable
2,000
4,000
6,000
Income tax payable
38,000
40,000
30,000
Long-term liabilities:
Notes payable
200,000
400,000
300,000
Stockholders’ equity:
Common stock
900,000
900,000
900,000
Retained earnings
1,809,000
1,679,000
1,600,000
Total liabilities and equity
$2,999,000
$3,088,000
$2,891,000
Required:
a. Calculate the following risk ratios for 2018 and 2019.
Receivables turnover ratio
Current ratio
Inventory turnover ratio
Debt to equity ratio
b. Calculate the following profitability ratios for 2018 and 2019.
Gross profit ratio
Profit margin
Return on assets
Asset turnover
c. Based on the ratios calculated, determine whether overall risk and profitability improved from 2018 to 2019.
The Sports Shack
Income Statements
For the years ended December 31
2019
2018
Sales revenue
$8,200,000
$6,600,000
Cost of goods sold
6,100,000
4,700,000
Gross profit
2,100,000
1,900,000
Expenses:
Operating expenses
1,450,000
1,400,000
Depreciation expense
90,000
100,000
Interest expense
25,000
50,000
Income tax expense
95,000
80,000
Total expenses
1,660,000
1,630,000
Net income
$440,000
$270,000
Explanation / Answer
a) Receivables Turnover Ratio = Sales / Average Receivables
For 2018:Average Receivables = opening receivables +closing receivables /2 = $880000+$680000/2= $780000
Receivables turnover ratio = $6600000/780000= 8.46 times
For 2019: Average Receivables = $1050000/$680000/2 = $865000
Receivables Turnover ratio= $8200000/865000=9.47 times
Current Ratiio = Current Assets/ Current Liabilities
For 2018: Current Assets= $218000+$680000+$1250000+$90000= $2238000
Current Liabilities = $65000+$4000+$40000= $109000
Current Ratio= $2238000/109000= 20.53
For 2019: Current Assets = $290000+$1050000+$919000+$80000= $2339000
Current Liabilities = $50000+$2000+$38000= $90000
Current Ratio= $2339000/90000= 25.98
Inventory Turnover Ratio = Cost of the goods sold/ Average Inventory
For 2018: Average inventory = opening inventory + closing inventory/2 = 1100000+1250000/2= $1175000
Inventory Turnover ratio = $4700000/1175000= 4 times
For 2019: Average Inventory = $1250000+$919000/2= $1084500
Inventory Turnover Ratio = $6100000/1084500= 5.62 times
Debt to Equity ratio = Debt / Equity
For 2018: 400000/ 900000+1679000= $400000/2579000= 0.15
For 2019: 200000/ 900000+1809000= $200000/ 2709000= 0.07
b) Gross Profit Ratio : Gross Profit /. sales
For 2018: 1900000/6600000= 28.78%
For 2019: 2100000/8200000= 25.60%
Profit Margin = Net income/ sales
For 2018: $270000/6600000= 4.09%
For 2019: $440000/8200000 = 5.36%
Reurn on Assets = Net income/ Average assets
For 2018: Average assets = Opening assets +closing assets /2 = $3088000+$2891000/2 = $2989500
Return on assets = $270000/ 2989500= 0.9%
For 2019: Average assets = $2999000+$3088000/2= $3043500
Return on assets = $440000/3043500= 14.45%
Asset Turnover ratio= Sales / Average assets
For 2018: $6600000/2989500= 2.2
For 2019: $8200000/3043500= 2.69
C) Overall risk measure :
Situation has improved in 2019 based on the risk ratios calculated. Receivables turnover ratio, current ratio and inventory turnover ratios have increased/improved which means firm is taking less time in collecting its receivables, has more current assets than current liabilities and inventory position is also improved. Also, Debt equity ratio is improved which means it has lesser debt obligations.
Overall profitability measure:
We can see that only Gross profit ratio declined in 2019. All other ratios have improved from 2018 to 2019 which means income and profitability has improved. Gross profit ratio decline will be covered by improvement in other profitability ratios. So, overall profitability has increased/improved.