Question

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Income statement and balance sheet data for The Athletic Attic are provided below.

THE ATHLETIC ATTIC Income Statements For the years ended December 31    2019    2018   Net sales $10,400,000 $8,900,000   Cost of goods sold 6,800,000 5,450,000        Gross profit 3,600,000 3,450,000   Expenses:       Operating expenses 1,600,000 1,600,000       Depreciation expense 200,000 210,000       Interest expense 40,000 50,000       Income tax expense 400,000 360,000         Total expenses 2,220,000 2,220,000   Net income $1,360,000 $1,230,000 THE ATHLETIC ATTIC Balance Sheets December 31    2019    2018    2017   Assets   Current assets:       Cash $   225,000    $   164,000    $   214,000          Accounts receivable 990,000    790,000    810,000          Inventory 1,725,000    1,405,000    1,075,000          Supplies 130,000    110,000    85,000      Long-term assets:         Equipment 1,100,000    1,150,000    1,150,000            Less: Accumulated depreciation (600,000) (420,000) (210,000)           Total assets $3,570,000    $3,199,000    $3,124,000      Liabilities and Stockholders' Equity   Current liabilities:       Accounts payable $   175,000    $   115,000    $     91,000          Interest payable 4,000    0    5,000          Income tax payable 40,000    40,000    31,000    Long-term liabilities:       Notes payable 500,000    600,000    600,000      Stockholders' equity:       Common stock 600,000    700,000    700,000          Retained earnings 2,251,000    1,744,000    1,697,000             Total liabilities and stockholders’ equity $3,570,000    $3,199,000    $3,124,000

Required:

1. Calculate the following risk ratios for 2018 and 2019: (Round your answers to 1 decimal place.)

2018 2019 Receivables turnover ratio times times Inventory turnover ratio times times Current ratio to 1 to 1 Debt to equity ratio % %

2. Calculate the following profitability ratios for 2018 and 2019: (Round your answers to 1 decimal place.)

2018 2019 Gross profit ratio % % Return on assets % % Profit margin % % Asset turnover times times

Answer 1

1. Calculate the following risk ratios for 2018 and 2019

(a)Receivables turnover ratio

Receivables turnover ratio = Net Sales / Average Accounts Receivables

2018

= $8900000 / [ ($790000 + $810000) / 2 ]

= $8900000 / $800000

= 11.1 Times

2019

= $10400000 / [ ($990000 + $790000) / 2 ]

= $10400000 / $890000

= 11.7 Times

(b)Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold / Average Inventory

2018

= $5450000/ [ ($1405000 + $1075000)/2]

=$5450000 / $1240000

= 4.4 Times

2019

= $6800000 / [ ($1725000 + $1405000)/2]

= $6800000 / $1575000

= 4.3 Times

(c)Current ratio

Current ratio = Total Current Assets / Total Current Liabilities

2018

= $2469000 / $155000

= 15.9

= 15.9 : 1

2019

= $3070000 / $219000

= 14.0

= 14.0 : 1

(d) Debt to equity ratio

Debt to equity ratio = Total Debt / Total Equity

2018

= [ $115000 + 40000 + 600000 ] / [700000 + 1744000 ]

= 30.9%

2019

= [ $175000 + 4000 + 40000+ 500000] / [ $600000 + 2251000 ]

= 25.2%

2. Calculate the following profitability ratios for 2018 and 2019

(a) Gross profit ratio

Gross profit ratio = [Gross Profit / Sales ]x 100

2018

= [$3450000 / 8900000 ] x 100

= 38.8%

2019

= [$3600000 / 10400000 ] x 100

= 34.6%

(b) Return on assets

Return on assets = [Net Income / Average Total Assets ] x 100

2018

= $1230000 / [ (3199000 + 3124000)/2 ] x 100

= 38.9%

2019

= $1360000 / [ (3570000 + 3199000)/2 ] x 100

= 40.2%

(c) Profit margin

Profit margin = [ Net Income / Sales ] x 100

2018

= [ $1230000 / $8900000 ] x 100

= 13.8%

2019

= [ $1360000 / $10400000 ] x 100

= 13.1%

(d) Asset turnover

Asset turnover = Sales / Average Total Assets

2018

= $8900000 / [ (3199000 + 3124000)/2 ]

= 2.8 Times

2019

= $10400000 / [ (3570000 + 3199000)/2 ]

= 3.1 Times