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Answer:
1.
Average Collection Period = 25.2 Days
Average Days In Inventory = 52.1 days
Current Ratio = 2.2 to 1
Debt to Equity Ratio = 88.5%
2.
The above ratios shows that Adrian Express is more risky than the Industry Average due to Debt to Equity Ratio which is worse than 50% of Industry Average, although the rest 3 ratios are much closer to industry average.
Explanation:
[tex]Average Collection Period =\frac{365}{Accounts Receivables Turnover Ratio}[/tex]
[tex]Accounts Receivables Turnover Ratio = \frac{Net Credit Sales}{Average Accounts Receivables}\\\\Net Credit Sales = 19,310,000\\Accounts Receivables In 2021 = 1,600,000\\Accounts Receivables In 2020 = 1,100,000[/tex]
[tex]Accounts Receivables Turnover Ratio = \frac{19310000}{\frac{1600000 + 1100000}{2} }\\Accounts Receivables Turnover Ratio = \frac{19310000}{1350000}\\Accounts Receivables Turnover Ratio = 14.30 times[/tex]
[tex]Average Collection Period =\frac{365}{14.30 times}\\Average Collection Period = 25.52 days[/tex]
The Average Collection Period is greater than the market average hence worse.
[tex]Average Days In Inventory = \frac{365}{Inventory Turnover}[/tex]
[tex]Inventory Turnover = \frac{CostOfGoodsSold}{Average Inventories}[/tex]
[tex]Inventory Turnover = \frac{12250000}{\frac{2000000 + 1500000}{2}}[/tex]
[tex]Inventory Turnover = \frac{12250000}{1750000}[/tex]
[tex]Inventory Turnover = 7 times[/tex]
[tex]Average Days In Inventory = \frac{365}{7 times}[/tex]
[tex]Average Days In Inventory = 52.14 days[/tex]
The Average Days in Inventory is less than the Industry average hence good.
[tex]Current Ratio = \frac{Current Assets}{Current Liabilities}[/tex]
[tex]Current Assets = Cash + Accounts Receivable + Inventory[/tex]
[tex]Current Assets = 700,000 + 1,600,000 + 2,000,000[/tex]
[tex]Current Assets = 4,300,000[/tex]
[tex]Current Liabilities = 1,920,000[/tex]
[tex]Current Ratio = \frac{4300000}{1920000}[/tex]
[tex]Current Ratio = 2.24 to 1[/tex]
Current Ratio is greater than Industry Average hence the Adrian Express is risky.
[tex]Debt To Equity Ratio = \frac{Total Liabilities}{Total Equity}[/tex]
[tex]Total Liabilities = Current Liabilities + Long Term Liabilities\\Total Liabilities = 1,920,000 + 2,400,000\\Total Liabilities = 4,320,000[/tex]
[tex]Total Equity = Common Stock + Retained Earnings\\Total Equity = 1,900,000 + 2,980,000\\Total Equity = 4,880,000[/tex]
[tex]Debt To Equity Ratio = \frac{4320000}{4880000}[/tex]
[tex]Debt To Equity Ratio = 88.5[/tex]%
Debt To Equity Ratio is greater than Industry Average, hence Adrian Express is risky as compared to Industry Average.
1. The Calculation of the four risk ratios for Adrian Express in 2021 is as follows:
a. Average Collection Period = Average Accounts Receivable/Net Sales x 365
= $1,350,000/$19,310,000 x 365
= 25.5 days
b. Average Days in Inventory = Cost of Goods Sold/Average Inventory
= 365 / 9.1
= 40.1 days
c. Current Ratio = Current Assets/Current Liabilities
= $4,300,000/$1,920,000
= 2.2 : 1
d. Debt to Equity Ratio = Total liabilities/Total Equity x 100
= 88.5% ($4,320,000 /$4,880,000 x 100)
2. Adrian Express is riskier than the industry average, especially with respect to its Debt to Equity Ratio because it appears highly leveraged.
Industry Averages Adrian Express
Average collection period 25 days 25.5 days
Average days in inventory 60 days 40.1 days
Current ratio 2 : 1 2.2 : 1
Debt to equity ratio 50% 88.5%
Data and Calculations:
Adrian Express
Income Statement
Sales Revenue $19,310,000
Cost of goods sold 12,250,000
Net income $1,700,000
ADRIAN EXPRESS
Balance Sheets
December 31, 2021 and 2020
2021 2020
Assets
Current assets: Cash $ 700,000 $ 860,000
Accounts receivable 1,600,000 1,100,000
Inventory 2,000,000 1,500,000
Current Assets $4,300,000 $3,460,000
Long-term assets 4,900,000 4,340,000
Total assets $ 9,200,000 $ 7,800,000
Liabilities and Stockholders' Equity
Current liabilities $ 1,920,000 $ 1,760,000
Long-term liabilities 2,400,000 2,500,000
Total liabilities $4,320,000 $4,250,000
Common stock 1,900,000 1,900,000
Retained earnings 2,980,000 1,640,000
Total Equity $4,880,000 $3,540,000
Total Liabilities & Equity $ 9,200,000 $ 7,800,000
Average Accounts Receivable = $1,350,000 ($1,600,000 + $1,100,000)
Average Inventory = $1,750 ($2,000,000 + $1,500,000)
Inventory Turnover = 9.1 times ($12,250,000/$1,350,000)
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