Explanation Risk Ratios: Risk ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company. Receivables turnover ratio: This is the ratio which analyzes the number of times accounts receivables is collected and converted into cash during the period. This ratio gauges the efficacy of collecting receivables. Larger the ratio represents that the company has more efficient in collecting receivables. This ratio is determined by dividing credit sales and average accounts receivable . It is calculated by using the following formula: Receivables turnover ratio = Net Credit sales Average Accounts Receivables × 100 Average days to collect accounts receivable (average collection period): This ratio measures the number of times receivables are collected in the period. This ratio analyzes the period receivables are outstanding. So, this ratio also gauges the efficacy of collecting receivables. Lower the ratio, more efficient the collection of receivables. Average days to sell inventory (average days in inventory): This ratio analyzes the period from the time inventory is acquired, to the period it is sold, in the period. This ratio measures the period inventory is held with the company. So, this ratio also gauges the efficacy of inventory management. Lower the ratio, more efficient the inventory management Inventory turnover: This is the ratio which analyzes the number of times inventory is sold during the period. This ratio gauges the efficacy of inventory management. Larger the ratio represents that the company has more efficient the inventory management. Current ratio : The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company. Acid-test ratio: The financial ratio which evaluates the ability of a company to pay off the instant debt obligations is referred to as quick ratio. Quick assets are cash, marketable securities, and accounts receivables. This ratio assesses the short-term liquidity of a company. Debt to Asset Ratio: Debt to asset ratio is the ration between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk. Times interest earned ratio: This financial metric gauges the company’s capability to pay the interest expense during a year. This ratio is also called as coverage ratio because this ratio analyzes the risk of the company to pay interest expense, at times of low earnings Calculate the given risk ratios for TA Attic for 2021as follows: 1. Calculate the receivables turnover ratio for TA Attic for 2021: Receivables turnover ratio = Net credit sales Average accounts receivables = $ 8 , 900 , 000 ( $ 810 , 000 + $ 790 , 000 ) 2 = $ 8 , 900 , 000 $ 800 , 000 = 11.1 times 2. Calculate the average collection period for TA Attic for 2021: Average collection period = 365 Days Receivables turnover ratio = 365 Days 11.1 times = 32.9 days 3. Calculate the inventory turnover ratio for TA Attic for 2021: Inventory turnover ratio = Cost of Goods Sold Average Inventory = $ 5 , 450 , 000 ( $ 1 , 075 , 000 + $ 1 , 405 , 000 ) 2 = $ 5 , 450 , 000 $ 1 , 240 , 000 = 4

Financial Accounting Connect Access Card

5th Edition

ISBN: 9781260159622

Author: J. David Spiceland

Publisher: Mcgraw-Hill

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Chapter 12, Problem 4PB

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Calculate the given risk ratios for TA Attic for 2021.

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Pasta Delight Company has the following data available: Net income $320,000 • Sales $3.2 million • Total asset turnover = 2.8 Equity multiplier = 2.2 Pasta Delight does not have any preferred stock outstanding. Calculate the return on assets (ROA) and return on equity (ROE) for the company.

Gross profit would be

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Financial Accounting Connect Access Card

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