Videos
1.
To Calculate: The given risk ratios for Company TAA for 2018 & 2019.
1.
Answer to Problem 12.6BP
The given risky ratios for Company TAA for 2018:
- a. Receivables turnover ratio – 11.1 times
- b. Inventory turnover ratio – 4.4 times
- c.
Current ratio – 15.9:1 - d. Debt to equity ratio – 30.9%
The given risky ratios for Company TAA for 2019:
- a. Receivables turnover ratio – 11.7 times
- b. Inventory turnover ratio – 4.3 times
- c. Current ratio – 14.0:1
- d. Debt to equity ratio – 25.2%
Explanation of Solution
Risk Ratios: Risk ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the risk of a company:
- a. Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return. It is calculated by using the following formula:
Calculate the receivables turnover ratio for Company TAA for 2018:
Calculate the receivables turnover ratio for Company TAA for 2019:
- b. Inventory Turnover Ratio: This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.
Formula:
Calculate the inventory turnover ratio for Company TAA for 2018:
Calculate the inventory turnover ratio for Company TAA for 2019:
- c. Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.
Formula:
Calculate the current ratio for Company TAA for 2018:
Calculate the current ratio for Company TAA for 2019:
- d. Debt to equity Ratio: Debt to equity ratio is used by the company to determine how well the company is able to survive the losses without damaging the creditors’ interest. It is determined by dividing total debt and total equity.
Formula:
Calculate the debt to equity ratio for Company TAA for 2018:
Calculate the debt to equity ratio for Company TAA for 2019:
2.
To Calculate: The given profitability ratios for Company TAA for 2018 & 2019.
2.
Answer to Problem 12.6BP
The given profitability ratios for Company TAA for 2018 are:
- a. Gross Profit ratio – 38.8%
- b. Return on Assets ratio – 38.9%
- c. Profit margin – 13.8%
- d. Assets turnover ratio – 2.8 times
The given profitability ratios for Company TAA for 2019 are:
- a. Gross Profit ratio – 34.6%
- b. Return on Assets ratio – 40.2%
- c. Profit margin – 13.1%
- d. Assets turnover ratio – 3.1 times
Explanation of Solution
Profitability ratios: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:
- a. Gross Profit ratio: Gross profit ratio is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:
Calculate the gross profit ratio for Company TAA for 2018:
Calculate the gross profit ratio for Company TAA for 2019:
- b. Return on asset ratio: Rate of return on total assets measures the profit generated from the use of total assets.
Formula:
Calculate the return on asset ratio for Company TAA for 2018:
Calculate the return on asset ratio for Company TAA for 2019:
- c. Profit margin: Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.
Formula:
Calculate the profit margin ratio for Company TAA for 2018:
Calculate the profit margin ratio for Company TAA for 2019:
- d. Assets turnover ratio: Asset turnover ratio is used to determine the asset’s efficiency towards sales.
Formula:
Calculate the assets turnover ratio for Company TAA for 2018:
Calculate the assets turnover ratio for Company TAA for 2019:
3.
whether overall risk and profitability ratios are improved from 2018 to 2019.
3.
Explanation of Solution
Regarding risk, the receivables turnover slightly improved and the debt to equity ratio has been declined, where both are positive signs. However, the inventory turnover ratio and current ratio both declined in 2019.
Profitability ratios are mixed. While net income has been increased by $130,000 in 2019, the gross profit ratio has declined from 38.8% to 34.6%. Return on assets has increased, profit margin has declined, and asset turnover has been improved.
Want to see more full solutions like this?
Chapter 12 Solutions
Financial Accounting
- Income statement and balance sheet data for The Athletic Attic are provided below. THE ATHLETIC ATTIC Income Statements For the years ended December 31 2022 2021 Net sales $ 12,920,000 $ 11,500,000 Cost of goods sold 8,420,000 7,200,000 Gross profit 4,500,000 4,300,000 Expenses: Operating expenses 1,780,000 1,730,000 Depreciation expense 200,000 200,000 Interest expense 58,000 58,000 Income tax expense 616,000 530,000 Total expenses 2,654,000 2,518,000 Net income $ 1,846,000 $ 1,782,000 THE ATHLETIC ATTIC Balance Sheets December 31 2022 2021 2020 Assets Current assets: Cash $ 243,000 $ 173,000 $ 240,000 Accounts receivable 1,008,000 758,000 778,000 Inventory 1,743,000 1,373,000 1,043,000 Supplies 148,000…arrow_forwardThe comparative statements of Pharoah Company are presented here: Pharoah CompanyIncome StatementsFor the Years Ended December 31 2020 2019 Net sales $1,898,740 $1,758,700 Cost of goods sold 1,066,740 1,014,200 Gross profit 832,000 744,500 Selling and administrative expenses 508,200 487,200 Income from operations 323,800 257,300 Other expenses and losses Interest expense 23,400 21,400 Income before income taxes 300,400 235,900 Income tax expense 93,400 74,400 Net income $207,000 $161,500 Pharoah CompanyBalance SheetsDecember 31 Assets 2020 2019 Current assets Cash $60,100 $64,200 Debt investments (short-term) 74,000 50,000 Accounts receivable 126,000 111,000 Inventory 127,400 116,900 Total current assets 387,500 342,100 Plant assets…arrow_forwardThe comparative statements of Blossom Company are presented here: Blossom CompanyIncome StatementsFor the Years Ended December 31 2020 2019 Net sales $1,899,640 $1,759,600 Cost of goods sold 1,067,640 1,015,100 Gross profit 832,000 744,500 Selling and administrative expenses 509,100 488,100 Income from operations 322,900 256,400 Other expenses and losses Interest expense 23,500 21,500 Income before income taxes 299,400 234,900 Income tax expense 93,500 74,500 Net income $205,900 $160,400 Blossom CompanyBalance SheetsDecember 31 Assets 2020 2019 Current assets Cash $60,100 $64,200 Debt investments (short-term) 74,000 50,000 Accounts receivable 126,900 111,900 Inventory 127,500 117,000 Total current assets 388,500 343,100 Plant assets…arrow_forward
- Use the given statement of comprehensive income below in answering the question. DEF Company, Income Statement 2021 2020 Sales P10,200.00 P9,600.00 Cost of Goods Sold P3,000.00 P2,600.00 Gross Profit P7,200.00 P7,000.00 Operating Expenses P2,400.00 P2,200.00 Operating Profit P4,800.00 P4,800.00 Interest Expense P900.00 P800.00 Earnings before tax P3,900.00 P4,000.00 Income Tax P1,560.00 P1,600.00 Net Profit P2,340.00 P2,400.00 How many percent of the sales is the operating expenses in 2021 and 2020? A 8.82% and 8.33% 70.59% and 72.92% 29.41% and 27.08% 23.53% and 22.92%arrow_forwardcalculate liquidity ratio efficiency ratios leverage ratios coverage ratio profitability ratios use these ratio prepare a report Income Statement 2020 2019 Balance Sheet 2020 2019 Sales 58,410 75,250 Assets Cost of goods sold 34,950 23,460 35,200 Cash 1,750 8,410 Gross Profit 40,050 Accounts Receivable 3,204 7,405 Selling & G&A Exp. 13,950 Depreciation Operating Expenses Operating Income Interest Expense 13,200 Inventories 9,450 8,500 1,788 1,785 Total Current Assets 14,404 24,315 15,738 14,985 Fixed Assets 30,120 29,471 7,722 (762) Pretax Income (EBT) 6,960 25,065 Total Assets 44,524 53,786 (855) 24,210 Liabilities and Shareholders' Equity Taxes 2,088 7,263 Accounts Payable Accrued Expenses 9,120 6,750 Net Income 4,872 16,947 6,520 6,424 Total Current Liabilities 15,640 13,174 Long-term Debt 24,120 15,780 Total Liabilities 39,760 28,954 Common Stock 55 56 Retained Earnings Total Equity Total Liabilities and Equity 17,660 15,765 17,715 15,821 57,475 44,775arrow_forwardIncome statement and balance sheet data for The Athletic Attic are provided below. THE ATHLETIC ATTIC Income Statements For the Years Ended December 31 2025 2024 Net sales $ 13,200,000 $ 11,800,000 Cost of goods sold 8,600,000 7,400,000 Gross profit 4,600,000 4,400,000 Expenses: Operating expenses 1,800,000 1,750,000 Depreciation expense 200,000 200,000 Interest expense 60,000 60,000 Income tax expense 640,000 550,000 Total expenses 2,700,000 2,560,000 Net income $ 1,900,000 $ 1,840,000 THE ATHLETIC ATTIC Balance Sheets December 31 2025 2024 2023 Assets Current assets: Cash $ 245,000 $ 175,000 $ 244,000 Accounts receivable 1,010,000 760,000 780,000 Inventory 1,745,000 1,375,000 1,045,000 Supplies 150,000 120,000 95,000 Long-term assets: Equipment 1,900,000 1,900,000 1,900,000 Less: Accumulated depreciation (800,000) (600,000) (400,000) Total assets $ 4,250,000 $ 3,730,000 $ 3,664,000 Liabilities…arrow_forward
- HIC GROUP OF Companies COMPARATIVE INCOME STATEMENT For years ended 3rd December 2019 2020 Revenue and gains Sales revenue 495,500 496,738.75 Interest revenue 278,500 279,196.25 Investment Income 71,700 71,879.25 Other revenue 101,500 101,753.75 Total revenue and gains 947,200 949,968 Expenses and losses Cost of good sold 450,000 447,750 Selling&administrative 185,000 184,075 Computer (operating) 42,500 42,288…arrow_forwardSelected comparative financial statements of Korbin Company follow. KORBIN COMPANY Comparative Income Statements For Years Ended December 31 2021 2020 2019 Sales $ 429,809 $ 329,269 $ 228,500 Cost of goods sold 258,745 207,439 146,240 Gross profit 171,064 121,830 82,260 Selling expenses 61,033 45,439 30,162 Administrative expenses 38,683 28,976 18,966 Total expenses 99,716 74,415 49,128 Income before taxes 71,348 47,415 33,132 Income tax expense 13,271 9,720 6,726 Net income $ 58,077 $ 37,695 $ 26,406 KORBIN COMPANY Comparative Balance Sheets December 31 2021 2020 2019 Assets Current assets $ 58,039 $ 38,846 $ 51,928 Long-term investments 0 1,100 3,100 Plant assets, net 106,146 96,441 57,969 Total assets $ 164,185 $ 136,387 $ 112,997 Liabilities and Equity Current liabilities $ 23,971 $ 20,322 $ 19,774 Common stock 67,000 67,000 49,000 Other paid-in capital 8,375 8,375 5,444 Retained earnings 64,839 40,690 38,779 Total liabilities and equity $ 164,185 $ 136,387 $…arrow_forwardHIC GROUP OF Companies COMPARATIVE INCOME STATEMENT For years ended 3rd December 2019 2020 Revenue and gains Sales revenue 495,500 496,738.75 Interest revenue 278,500 279,196.25 Investment Income 71,700 71,879.25 Other revenue 101,500 101,753.75 Total revenue and gains 947,200 949,968 Expenses and losses Cost of good sold 450,000 447,750 Selling&administrative 185,000 184,075 Computer (operating) 42,500 42,288 Depreciation 50,000…arrow_forward
- Selected comparative financial statements of Korbin Company follow. KORBIN COMPANY Comparative Income Statements For Years Ended December 31 2021 2020 2019 Sales $ 541,916 $ 415,152 $ 288,100 Cost of goods sold 326,233 260,300 184,384 Gross profit 215,683 154,852 103,716 Selling expenses 76,952 57,291 38,029 Administrative expenses 48,772 36,533 23,912 Total expenses 125,724 93,824 61,941 Income before taxes 89,959 61,028 41,775 Income tax expense 16,732 12,511 8,480 Net income $ 73,227 $ 48,517 $ 33,295 KORBIN COMPANY Comparative Balance Sheets December 31 2021 2020 2019 Assets Current assets $ 57,416 $ 38,429 $ 51,370 Long-term investments 0 800 4,560 Plant assets, net 105,006 95,694 55,854 Total assets $ 162,422 $ 134,923 $ 111,784 Liabilities and Equity Current liabilities $ 23,714 $ 20,104 $ 19,562 Common stock 72,000 72,000 54,000 Other paid-in capital 9,000 9,000 6,000 Retained earnings 57,708 33,819…arrow_forwardThe comparative statements of Sunland Company are presented here: Sunland CompanyIncome StatementsFor the Years Ended December 31 2020 2019 Net sales $1,898,440 $1,758,400 Cost of goods sold 1,066,440 1,013,900 Gross profit 832,000 744,500 Selling and administrative expenses 507,900 486,900 Income from operations 324,100 257,600 Other expenses and losses Interest expense 23,900 21,900 Income before income taxes 300,200 235,700 Income tax expense 93,900 74,900 Net income $206,300 $160,800 Sunland CompanyBalance SheetsDecember 31 Assets 2020 2019 Current assets Cash $60,100 $64,200 Debt investments (short-term) 74,000 50,000 Accounts receivable 125,700 110,700 Inventory 127,900 117,400 Total current assets 387,700 342,300 Plant assets…arrow_forwardSelected comparative financial statements of Korbin Company follow. KORBIN COMPANY Comparative Income Statements For Years Ended December 31 2021 2020 2019 Sales $ 510,880 $ 391,376 $ 271,600 Cost of goods sold 307,550 248,524 173,824 Gross profit 203,330 142,852 97,776 Selling expenses 72,545 54,010 35,851 Administrative expenses 45,979 34,441 22,543 Total expenses 118,524 88,451 58,394 Income before taxes 84,806 54,401 39,382 Income tax expense 15,774 11,152 7,995 Net income $ 69,032 $ 43,249 $ 31,387 KORBIN COMPANY Comparative Balance Sheets December 31 2021 2020 2019 Assets Current assets $ 53,905 $ 36,079 $ 48,229 Long-term investments 0 500 3,040 Plant assets, net 101,665 92,652 55,799 Total assets $ 155,570 $ 129,231 $ 107,068 Liabilities and Equity Current liabilities $ 22,713 $ 19,255 $ 18,737 Common stock 68,000 68,000 50,000 Other paid-in capital 8,500 8,500 5,556 Retained earnings 56,357 33,476…arrow_forward
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning