Problem 12-6A Use ratios to analyze risk and profitability (LO12-3, 12-4) [The f
ID: 2573171 • Letter: P
Question
Problem 12-6A Use ratios to analyze risk and profitability (LO12-3, 12-4)
[The following information applies to the questions displayed below.]
Income statements and balance sheets data for Virtual Gaming Systems are provided below.
Income Statements
For the year ended December 31 2019 2018 Net sales $3,505,000 $3,031,000 Cost of goods sold 2,479,000 1,949,000 Gross profit 1,026,000 1,082,000 Expenses: Operating expenses 954,000 857,000 Depreciation expense 29,000 26,500 Loss on sale of land 0 7,900 Interest expense 17,500 14,500 Income tax expense 7,900 47,500 Total expenses 1,008,400 953,400 Net income $ 17,600 $ 128,600 Problem 12-6A Part 1 Required: 1. Calculate the following risk ratios for 2018 and 2019: (Round your answers to 1 decimal place.) Receivables turnover ratio Inventory turnover ratio Current ratio Debt to equity ratio 2018 43.6 times 16.4 times 2019 45.4 times 21.7|times to 1 to 1
Explanation / Answer
1.
Receivable turnover ratio = Net sales/ Average accounts receivables
2019 = $3540000/ [($84000+87000)/2] = 41.4 times
2018 = $3066000/ [($87000+66000)/2] = 40.1 times
Inventory turnover ratio = Cost of goods sold/ Average inventory
2019 = $2486000/ [($134000+111000)/2] = 20.3 times
2018 = $1956000/ [($111000+141000)/2] = 15.5 times
Current ratio = Current assets/ Current liabilities
2019 = $442600/ $163200 = 2.7 to 1
2018 = $402600/ $97200 = 4.1 to 1
Debt to equity ratio = Total debt/ Equity
2019 = $623200/ $428400 = 145.5%
2018 = $388200/ $539400 = 72.0%
Summary
2.
Gross profit ratio = Gross profit/ Net sales
2018 = $1110000/ $3066000 = 36.2%
2019 = $1054000/ $3540000 = 29.8%
Return on assets = Net income/ Total assets
2018 = $138400/ $927600 = 14.9%
2019 = $27400/ $1051600 = 2.6%
Profit margin = Net income/ Sales
2018 = $138400/ 3066000 = 4.5%
2019 = $27400/ 3540000 = 0.8%
Asset turnover = Net sales/ Average total assets
2018 = $3066000/ [($927600+777720)/2] = 3.6 times
2019 = $3540000/ [($927600+1051600)/2] = 3.6 times
Summary
2018 2019 Receivable turnover ratio 40.1 times 41.4 times Inventory turnover ratio 15.5 times 20.3 times Current ratio 4.1 to 1 2.7 to 1 Debt to equity ratio 72.0% 145.5%