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1.
To Calculate: The given risk ratios for Company TAA for 2018 & 2019.
1.
Answer to Problem 12.6BP
The given risky ratios for Company TAA for 2018:
- a. Receivables turnover ratio – 11.1 times
- b. Inventory turnover ratio – 4.4 times
- c.
Current ratio – 15.9:1 - d. Debt to equity ratio – 30.9%
The given risky ratios for Company TAA for 2019:
- a. Receivables turnover ratio – 11.7 times
- b. Inventory turnover ratio – 4.3 times
- c. Current ratio – 14.0:1
- d. Debt to equity ratio – 25.2%
Explanation of Solution
Risk Ratios: Risk ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the risk of a company:
- a. Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the
accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return. It is calculated by using the following formula:
Calculate the receivables turnover ratio for Company TAA for 2018:
Calculate the receivables turnover ratio for Company TAA for 2019:
- b. Inventory Turnover Ratio: This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.
Formula:
Calculate the inventory turnover ratio for Company TAA for 2018:
Calculate the inventory turnover ratio for Company TAA for 2019:
- c. Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.
Formula:
Calculate the current ratio for Company TAA for 2018:
Calculate the current ratio for Company TAA for 2019:
- d. Debt to equity Ratio: Debt to equity ratio is used by the company to determine how well the company is able to survive the losses without damaging the creditors’ interest. It is determined by dividing total debt and total equity.
Formula:
Calculate the debt to equity ratio for Company TAA for 2018:
Calculate the debt to equity ratio for Company TAA for 2019:
2.
To Calculate: The given profitability ratios for Company TAA for 2018 & 2019.
2.
Answer to Problem 12.6BP
The given profitability ratios for Company TAA for 2018 are:
- a. Gross Profit ratio – 38.8%
- b. Return on Assets ratio – 38.9%
- c. Profit margin – 13.8%
- d. Assets turnover ratio – 2.8 times
The given profitability ratios for Company TAA for 2019 are:
- a. Gross Profit ratio – 34.6%
- b. Return on Assets ratio – 40.2%
- c. Profit margin – 13.1%
- d. Assets turnover ratio – 3.1 times
Explanation of Solution
Profitability ratios: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:
- a. Gross Profit ratio: Gross profit ratio is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:
Calculate the gross profit ratio for Company TAA for 2018:
Calculate the gross profit ratio for Company TAA for 2019:
- b. Return on asset ratio:
Rate of return on total assets measures the profit generated from the use of total assets.
Formula:
Calculate the return on asset ratio for Company TAA for 2018:
Calculate the return on asset ratio for Company TAA for 2019:
- c. Profit margin: Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.
Formula:
Calculate the profit margin ratio for Company TAA for 2018:
Calculate the profit margin ratio for Company TAA for 2019:
- d. Assets turnover ratio: Asset turnover ratio is used to determine the asset’s efficiency towards sales.
Formula:
Calculate the assets turnover ratio for Company TAA for 2018:
Calculate the assets turnover ratio for Company TAA for 2019:
3.
whether overall risk and profitability ratios are improved from 2018 to 2019.
3.
Explanation of Solution
Regarding risk, the receivables turnover slightly improved and the debt to equity ratio has been declined, where both are positive signs. However, the inventory turnover ratio and current ratio both declined in 2019.
Profitability ratios are mixed. While net income has been increased by $130,000 in 2019, the gross profit ratio has declined from 38.8% to 34.6%. Return on assets has increased, profit margin has declined, and asset turnover has been improved.
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Chapter 12 Solutions
Financial Accounting
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