The 2012 income statement of Adrian Express reports sales of $21 million, cost o
ID: 2652668 • Letter: T
Question
The 2012 income statement of Adrian Express reports sales of $21 million, cost of goods sold of $12.6 million, and net income of $2.6 million. Balance sheet information is provided in the following table. All amounts are in thousands.
ADRIAN EXPRESS
Balance Sheets
December 31, 2012 and 2011
($ in 000s) 2012 2011
Assets
Current assets:
Cash $ 680 $ 840
Accounts receivable 1,820 1,420
Inventory 1,800 1,400
Long-term assets 5,200 4,480
Total assets $ 9,500 $ 8,140
Liabilities and Stockholders' Equity
Current liabilities $ 2,260 $ 1,900
Long-term liabilities 2,600 2,700
Common stock 2,000 2,000
Retained earnings 2,640 1,540
Total liabilities and stockholders' equity $ 9,500 $ 8,140
Industry averages for the following four risk ratios are as follows:
Average collection period 27 days
Average days in inventory 46 days
Current ratio 2 to 1
Debt to equity ratio 50%
Required:
1.
Calculate the four risk ratios listed above for Adrian Express in 2012. (Use 365 days in a year. Round your answers to 1 decimal place. Omit the "%" sign in your response.)
Risk Ratios
Average collection period days
Average days in inventory days
Current ratio to 1
Debt to equity ratio %
2. Do you think the company is more risky or less risky than the industry averages?
(Click to select)
Less risky
More risky
Explanation / Answer
1. Calculate the four risk ratios listed above for Adrian Express in 2012.
Solution-
Receivable turnover ratio = Net Credit Sales / Average account receivables
Receivable turnover ratio = $21,000,000 / ($1,820,000 + $1,420,000) / 2
Receivable turnover ratio = 12.96 times
Average collection period = 365 / Receivable turnover
Average collection period = 365 /12.96
Average collection period = 28.16 Days
Inventory turnover ratio = Cost of goods sold / Average Inventory
Inventory turnover ratio = $12,600,000 / ($1,800,000 + $1,400,000) / 2
Inventory turnover ratio = $12,600,000 / $1,600,000
Inventory turnover ratio = 7.87 times
Average days in inventory = 365 / Inventory turnover
Average days in inventory = 365 / 7.87
Average days in inventory = 36.37 days
Current ratio = Current assets / Current liabilities
Current ratio = $4,300 / $2,260
Current ratio = 1.90 to 1
Debt to equity ratio = Total liabilities / Total shareholders' equity
Debt to equity ratio = $4,860 / $4,640
Debt to equity ratio = 104.75%
2. Do you think the company is more risky or less risky than the industry averages?
Solution-
Adrian Express is more risky from the industry averages because inventory turnover ratio, receivable turnover ration and current ratio are worse from the industry average and the Debt to equity ratio is more worse from industry average of 50%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.