Question

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Income statements and balance sheets data for Virtual Gaming Systems are provided below.

VIRTUAL GAMING SYSTEMS Income Statements

For the year ended December 31

	2019	2018
Net sales	3,470,000	2,996,000
Cost of goods sold	2,472,000	1,942,000
Gross Profit	998,000	1,054,000
Expenses:
Operating Expenses	947,000	850,000
Depreciation expenses	22,000	23,000
Loss on sale of land	0	7,200
Interest expense	14,000	11,000
Income tax expense	7,200	44,000
Total expenses	990,200	935,200
Net income	7,800	118,800

VIRTUAL GAMING SYSTEMS

Balance Sheets

December 31

	2019	2018	2017
Assets
Current assets:
Cash	197,000	178,000	136,000
Accounts receivable	71,000	73,000	52,000
Inventory	121,000	97,000	127,000
Prepaid rent	13,200	11,200	5,040
Long-term assets:
Investment bonds	97,000	97,000	0
Land	292,000	202,000	232,000
Equipment	292,000	262,000	202,000
Less: Accumulated depreciation	(79,000)	(57,000)	(34,000)
Total Assets	1,004,200	863,200	720,040
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable	264,600	58,000	93,640
Interest Payable	6,600	4,400	2,200
Income tax payable	11,200	11,000	13,200
Long-term liabilities:
Notes payable	320,000	277,000	217,000
Stockholders' equity:
Common stock	292,000	292,000	292,000
Retained earnings	109,800	220,800	102,000
Total liabilities and stockholders' equity	1,004,200	863,200	720,040

Required:

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

Receivables turnover ratio

Inventory turnover ratio        

Current ratio

Debt to equity ratio

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

Gross profit ratio

Return on assets

Profit margin

Asset turnover

Answer 1

1. Receivables turnover ratio = Net Credit Sales / Average accounts receivable

2018 = {$2,996,000} / {(73,000 + 52,000) / 2} = 47.9 times
2019 = {3,470,000} / {(71,000 + 73,000) / 2} = 48.2 times

Inventory turnover ratio = Cost of goods sold / Average Inventory

2018 = {$1,942,000} / {(97,000 + 127,000) / 2} = 17.3 times
2019 = {$2,472,000} / {(121,000 + 97,000) / 2} = 22.7 times

Current ratio = Current Assets / Current Liabilities
2018 = ($178,000 + 73,000 + 97,000 + 11,200) / (58,000 + 4,400 + 11,000) =
= $359,200 / $73,400 = 4.9 times
2019 =    ($197,000 + 71,000 + 121,000 + 13,200) / (264,600 + 6,600 + 11,200) =
= $402,200 / $282,400 = 1.4 times

Debt to equity ratio = Debt / Equity
2018 = ($73,400 + 277,000) / ($292,000 + 220,800) = 0.7 times
2019 = ($282,400 + 320,000) / ($292,000 + 109,800) = 1.5 times

2.  Gross profit ratio = Gross profit / Sales
2018 = $1,054,000 / $2,996,000 = 35.2%
2019 = $998,000 / $3,470,000 = 28.8%

Return on assets = Net Income / Average total assets
      2018 = {$118,800} / {(863,200 + 720,040) / 2} = 15.0%
2019 = {$7,800} / {(1,004,200 + 863,200) / 2} = 0.8%

Profit margin = Net Income / Net Sales
2018 =  $118,800 / $2,996,000 = 4.0%
2019 = $7,800 / $3,470,000 = 0.2%

Asset turnover = Net Sales / Average Total assets
  2018 = {$2,996,000} / {(863,200 + 720,040) / 2} = 3.8 times
2019 = {$3,470,000} / {(1,004,200 + 863,200) / 2} = 3.7 times