Risk Ratios
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![### Required:
1. **Calculate the four risk ratios listed above for Adrian Express in 2021.**
- *(Use 365 days in a year. Round your answers to 1 decimal place.)*
| Risk Ratios | |
|---------------------------|------------------------------------|
| Average collection period | **27.0** days |
| Average days in inventory | ___________days |
| Current ratio | ___________to 1 |
| Debt to equity ratio | ___________% |
2. **Do you think the company is more risky or less risky than the industry average?**
- [ ] More risky
- [ ] Less risky
### Explanation:
The table titled "Risk Ratios" presents financial metrics used to assess the financial health and risk level of Adrian Express in 2021. The values in the table need to be completed for a comprehensive risk assessment. The average collection period is already noted as 27.0 days. Subsequently, the questionnaire seeks an evaluation of the company's risk position in comparison to the industry average.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0b6b9b71-5b23-41fa-a1dc-7b1c4c443176%2Fd804b9b5-7643-4ec8-b130-e3dd8923c50a%2Fhpaaf3p_processed.png&w=3840&q=75)
Transcribed Image Text:### Required:
1. **Calculate the four risk ratios listed above for Adrian Express in 2021.**
- *(Use 365 days in a year. Round your answers to 1 decimal place.)*
| Risk Ratios | |
|---------------------------|------------------------------------|
| Average collection period | **27.0** days |
| Average days in inventory | ___________days |
| Current ratio | ___________to 1 |
| Debt to equity ratio | ___________% |
2. **Do you think the company is more risky or less risky than the industry average?**
- [ ] More risky
- [ ] Less risky
### Explanation:
The table titled "Risk Ratios" presents financial metrics used to assess the financial health and risk level of Adrian Express in 2021. The values in the table need to be completed for a comprehensive risk assessment. The average collection period is already noted as 27.0 days. Subsequently, the questionnaire seeks an evaluation of the company's risk position in comparison to the industry average.
Transcribed Image Text:The 2021 income statement of Adrian Express reports sales of $15,960,000, cost of goods sold of $9,600,000, and net income of $1,600,000. Balance sheet information is provided in the following table.
**ADRIAN EXPRESS Balance Sheets**
*December 31, 2021 and 2020*
| | 2021 | 2020 |
|------------------|-------------|-------------|
| **Assets** | | |
| Current assets: | | |
| Cash | $ 600,000 | $ 760,000 |
| Accounts receivable | 1,400,000 | 1,000,000 |
| Inventory | 1,800,000 | 1,400,000 |
| Long-term assets | 4,800,000 | 4,240,000 |
| **Total assets** | $8,600,000 | $7,400,000 |
| | | |
| **Liabilities and Stockholders' Equity** | | |
| Current liabilities | $2,020,000 | $1,660,000 |
| Long-term liabilities | 2,300,000 | 2,400,000 |
| Common stock | 2,000,000 | 2,000,000 |
| Retained earnings | 2,280,000 | 1,340,000 |
| **Total liabilities and stockholders' equity** | $8,600,000 | $7,400,000 |
Industry averages for the following four risk ratios are as follows:
| | |
|----------------------------------|----------|
| Average collection period | 25 days |
| Average days in inventory | 60 days |
| Current ratio | 2 to 1 |
| Debt to equity ratio | 50% |
### Explanation:
- **Assets**: Includes current assets (cash, accounts receivable, inventory) and long-term assets, totaling $8,600,000 in 2021 and $7,400,000 in 2020.
- **Liabilities and Stockholders' Equity**: Comprises current and long-term liabilities, common stock, and retained earnings, matching the total assets for both
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1. Formula to compute average collection period
VIEWComputation of average collection period
VIEWFormula to compute average days in inventory
VIEWComputation of average days in inventory
VIEWFormula to compute current ratio
VIEWComputation of current ratio
VIEWFormula to compute debt to equity ratio
VIEWComputation of debt to equity ratio
VIEWAnswer
VIEW2. Risk of the ratios in comparison to industry average
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