Question

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 $11,800,000 $10,300,000

  Cost of goods sold $7,700,000 $6,400,000

       Gross profit $4,100,000 $3,900,000

  Expenses:  

      Operating expenses $1,700,000 $1,650,000

      Depreciation expense $200,000 $200,000

      Interest expense $50,000 $50,000

      Income tax expense $520,000 $450,000

        Total expenses $2,470,000 $2,350,000

  Net income    $1,630,000 $1,550,000

THE ATHLETIC ATTIC
Balance Sheets
December 31

2019 2018 2017

  Assets   

  Current assets:   

      Cash $235,000 $164,000 $224,000   

      Accounts receivable $1,000,000 $750,000 $770,000   

      Inventory $1,735,000 $1,365,000 $1,035,000   

      Supplies $140,000 $110,000 $85,000   

  Long-term assets:   

        Equipment $1,500,000 $1,500,000 $1,500,000   

        Less: Accumulated

depreciation (700,000) (500,000) (300,000)

Total assets $3,910,000 $3,389,000 $3,314,000   

  Liabilities and Stockholders' Equity   

  Current liabilities:   

      Accounts payable $204,000 $135,000 $120,000   

      Interest payable $5,000 $0 $5,000   

      Income tax payable $50,000 $45,000 $40,000   

Long-term liabilities:   

      Notes payable $600,000 $600,000 $600,000   

  Stockholders' equity:   

      Common stock $700,000 $700,000 $700,000   

      Retained earnings $2,351,000 $1,909,000 $1,849,000   

         Total liabilities and

stockholders’ equity $3,910,000 $3,389,000 $3,314,000   

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)

Computation of Risk ratios

Ratios	Formula	2018	2019
Receivables Turnover Ratio	(Net sales / Average accounts receivables )	(10300000 / 760000) 13.55 times	(11800000 / 875000) 13.49 times
Inventory turnover Ratio	(Cost of goods sold / Average inventory)	(6400000 / 1200000) 5.33 times	(7700000 / 1550000) 4.97 times
Current ratio	(Current Assets / Current liabilities)	(2389000 / 180000) 13.27 to 1	(3110000 / 259000) 12 to 1
Debt to Equity ratio	(Total Liabilities / Total shareholder's Equity)	(780000 / 2609000) 29.9%	(859000 / 3051000) 28.15%

Notes
1- Average account receivables = (Accounts receivable of previous year + Accounts receivable of current year) / 2
2- Average Inventory = (Average inventory of previous year + Average inventory of current year) / 2
3- Total liabilities will include both current and long tern liabilities
4- Total assets will include both current and long term assets
5- Average total assets = (Total assets of previous year + Total assets of current year ) / 2

(2)

Computation of Profitability ratios

Ratios	Formula	2018	2019
Gross profit ratio	(Gross profit / Net sales)	(3900000 / 10300000) 37.86 %	(4100000 / 11800000) 34.75%
Return on Assets	(Net profit / Total Assets)	(1550000 / 3389000) 45.74%	(1630000 / 3910000) 41.69%
Profit margin	(Net profit / Net sales)	(1550000 / 10300000) 15%	(1630000 / 11800000) 13.81%
Asset turnover	(Net sales / Average total assets)	(10300000 / 3351500) 3.07 times	(11800000 / 3649500) 3.23 times