Question

Condensed statement of financial position and income statement data for Richetti Ltd. are shown below: RICHETTI LTD. Statement of Financial Position December 31 (in thousands) 2018 2017 2016 Assets Current assets    Cash $28 $81 $200    Accounts receivable 908 707 497    Inventory 1,188 794 504 Total current assets 2,124 1,582 1,201 Property, plant, and equipment (net) 4,076 3,778 3,195 Total assets $6,200 $5,360 $4,396 Liabilities and Shareholders’ Equity Liabilities    Current liabilities $600 $553 $497    Non-current liabilities 3,042 2,330 1,491       Total liabilities 3,642 2,883 1,988 Shareholders’ equity    Common shares 996 996 996    Retained earnings 1,562 1,481 1,412       Total shareholders’ equity 2,558 2,477 2,408 Total liabilities and shareholders’ equity $6,200 $5,360 $4,396 RICHETTI LTD. Income Statement Year Ended December 31 (in thousands) 2018 2017 2016 Sales (all on credit) $4,505 $4,019 $3,574 Cost of goods sold 2,483 2,109 1,797 Gross profit 2,022 1,910 1,777 Operating expenses 1,438 1,479 1,492 Income from operations 584 431 285 Interest expense 190 131 70 Income before income tax 394 300 215 Income tax expense 99 75 54 Net income $295 $225 $161

(a1) Calculate the receivables turnover ratio, inventory turnover ratio, and current ratio for all three years. Assume that the accounts receivable and inventory balances at the end of 2015 were equal to the balances at the end of 2016. The company does not have an allowance for doubtful accounts and all sales are on credit. (Round answers to 1 decimal place, e.g. 5.2%.) a-2 Gross Profit Margin rounded to one decimal place: 2016=% 2017=% 2018=% a-3 Profit Margin rounded to one decimal place: 2016=% 2017=% 2018=% a-4 Calculate the debt to total assets ratio and the times interest earned ratio (round to one decimal place 2016=___% ___times 2017=___% ___times 2018=___% ___times

Answer 1

Answer:

(a1)

Accounts receivable turnover ratio = Net Credit Sales / Average accounts receivable

Here, It is given that all the sales are on credit.

Average accounts receivable = (Opening accounts receivable + Closing accounts receivable) / 2

Average accounts receivable for 2016 = ($497 + $497) / 2 = $497 (It isgiven that balances are equal)

Average accounts receivable for 2017 = ($497 + $707) / 2 = $602

Average accounts receivable for 2018 = ($707 + $908) / 2 = $807.5

Accounts receivable turnover ratio = Net Credit Sales / Average accounts receivable

Accounts receivable turnover ratio (2016) = $3,574 / $497 = 7.2

Accounts receivable turnover ratio (2017) = $4,019 / $602 = 6.7

Accounts receivable turnover ratio (2018) = $4,505 / $807.5 = 5.6

Inventory turnover ratio = Cost of goods sold / Average inventory

Average Inventory = (Opening Inventory + Closing Inventory ) / 2

Average Inventory for 2016 = ($504 + $504) / 2 = $504 (It isgiven that balances are equal)

Average Inventory for 2017 = ($504 + $794) / 2 = $649

Average Inventory for 2018 = ($794 + $1,188) / 2 = $991

Inventory turnover ratio = Cost of goods sold / Average inventory

Inventory turnover ratio (2016) = $1,797 / $504 = 3.5

Inventory turnover ratio (2017) = $2,109 / $649 = 3.2

Inventory turnover ratio (2018) = $2,483 / $991 = 2.5

Current ratio = Current Assets / Current Liabilities

Current ratio (2016) = $1,201 / $497 = 2.4

Current ratio (2017) = $1,582 / $553 = 2.8

Current ratio (2018) = $2,124 / $600 = 3.5

(a2)

Gross Profit margin = (Gross Profit for the year / Sales revenue of the year) * 100

Gross Profit margin (2016) = ($1,777 / $3,574) * 100 = 49.7%

Gross Profit margin (2017) = ($1,910 / $4,019) * 100 = 47.5%

Gross Profit margin (2018) = ($2,022 / $4,505) * 100 = 44.9%\

(a3)

Profit margin = (Net Profit for the year / Sales revenue of the year) * 100

Here,Net profit is Net income.

Profit margin (2016) = ($161 / $3,574) * 100 = 4.5%

Profit margin (2017) = ($225 / $4,019) * 100 = 5.6%

Profit margin (2018) = ($295 / $4,505) * 100 = 6.5%

(a4)

Debt to Total assets ratio = Total Liabilities / Total assets

Debt to Total assets ratio (2016) = $1,988 / $4,396 = 45.2%

Debt to Total assets ratio (2017) = $2,883 / $5,360 = 53.8%

Debt to Total assets ratio (2018) = $3,642 / $6,200 = 58.7%

Times interest earned = Earnings before Interest and Tax / Interest expense

Here,Earnings before Interest and Tax is Income from operations

Times interest earned (2016) = $285 / $70 = 4.1

Times interest earned (2017) = $431 / $131 = 3.3

Times interest earned (2018) = $584 / $190 = 3.1