Explanation 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: 1. 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: Receivables turnover ratio = Net Credit sales Average Accounts Receivables × 100 Calculate the receivables turnover ratio for VG Systems for 2018: Receivables turnover ratio = Net Credit sales Average Accounts Receivables = $ 3 , 086 , 000 ( $ 70 , 000 + $ 91 , 000 ) / 2 = $ 3 , 086 , 000 $ 161 , 000 / 2 = $ 3 , 086 , 000 $ 80 , 500 = 38.3 times 2. Average collection period: This ratio is used to determine the number of days a particular company takes to collect accounts receivables. Formula: Average collection period = 365 Days Receivables turnover ratio Calculate the average collection period for VG Systems for 2018: Average collection period = 365 Days Receivables turnover ratio = 365 Days 38.3 times = 9.5 days 3. 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: Inventory turnover ratio = Cost of Goods Sold Average Inventory Calculate the inventory turnover ratio for VG Systems for 2018: Inventory turnover ratio = Cost of Goods Sold Average Inventory = $ 1 , 960 , 000 ( $ 145 , 000 + $ 115 , 000 ) / 2 = $ 1 , 960 , 000 $ 260 , 000 / 2 = $ 1 , 960 , 000 $ 130 , 000 = 15.1 times 4. Average days in inventory: Average days in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them. Formula: Average days in inventory = 365 days Inventory turnover ratio Calculate the average days in inventory for VG Systems for 2018: Average days in inventory = 365 days Inventory turnover ratio = 365 days 15

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ISBN: 9781259934773

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