Question

Income statement and balance sheet data for The Sports Shack are provided below. The Sports Shack...

Income statement and balance sheet data for The Sports Shack are provided below.

The Sports Shack
Income Statements
For the years ended December 31

2019

2018

Sales revenue

$8,200,000

$6,600,000

Cost of goods sold

6,100,000

4,700,000

Gross profit

2,100,000

1,900,000

       Expenses:

           Operating expenses

1,450,000

1,400,000

           Depreciation expense

90,000

100,000

           Interest expense

25,000

50,000

           Income tax expense

95,000

80,000

               Total expenses

1,660,000

1,630,000

Net income

$440,000

$270,000

The Sports Shack
Balance Sheets
December 31

Assets

2019

2018

2017

Current assets:

        Cash

$290,000

$218,000

$196,000

        Accounts receivable

1,050,000

680,000

880,000

        Inventory

919,000

1,250,000

1,100,000

        Supplies

80,000

90,000

65,000

Long-term assets:

        Equipment

1,100,000

1,200,000

900,000

        Accumulated depreciation

(440,000)

(350,000)

(250,000)

Total assets

$2,999,000

$3,088,000

$2,891,000

Liabilities and Stockholders’ Equity

Current liabilities:

        Accounts payable

$50,000

$65,000

$55,000

        Interest payable

2,000

4,000

6,000

        Income tax payable

38,000

40,000

30,000

Long-term liabilities:

        Notes payable

200,000

400,000

300,000

Stockholders’ equity:

        Common stock

900,000

900,000

900,000

        Retained earnings

1,809,000

1,679,000

1,600,000

Total liabilities and equity

$2,999,000

$3,088,000

$2,891,000


Required:

a. Calculate the following risk ratios for 2018 and 2019.

Receivables turnover ratio

Current ratio

Inventory turnover ratio

Debt to equity ratio


b. Calculate the following profitability ratios for 2018 and 2019.

Gross profit ratio

Profit margin

Return on assets

Asset turnover


c. Based on the ratios calculated, determine whether overall risk and profitability improved from 2018 to 2019.

Homework Answers

Answer #1

a) Receivables Turnover Ratio = Sales / Average Receivables

For 2018:Average Receivables = opening receivables +closing receivables /2 = $880000+$680000/2= $780000

Receivables turnover ratio = $6600000/780000= 8.46 times

For 2019: Average Receivables = $1050000/$680000/2 = $865000

Receivables Turnover ratio= $8200000/865000=9.47 times

Current Ratiio = Current Assets/ Current Liabilities

For 2018: Current Assets= $218000+$680000+$1250000+$90000= $2238000

Current Liabilities = $65000+$4000+$40000= $109000

Current Ratio= $2238000/109000= 20.53

For 2019: Current Assets = $290000+$1050000+$919000+$80000= $2339000

Current Liabilities = $50000+$2000+$38000= $90000

Current Ratio= $2339000/90000= 25.98

Inventory Turnover Ratio = Cost of the goods sold/ Average Inventory

For 2018: Average inventory = opening inventory + closing inventory/2 = 1100000+1250000/2= $1175000

Inventory Turnover ratio = $4700000/1175000= 4 times

For 2019: Average Inventory = $1250000+$919000/2= $1084500

Inventory Turnover Ratio = $6100000/1084500= 5.62 times

Debt to Equity ratio = Debt / Equity

For 2018: 400000/ 900000+1679000= $400000/2579000= 0.15

For 2019: 200000/ 900000+1809000= $200000/ 2709000= 0.07

b) Gross Profit Ratio : Gross Profit /. sales

For 2018: 1900000/6600000= 28.78%

For 2019: 2100000/8200000= 25.60%

Profit Margin = Net income/ sales

For 2018: $270000/6600000= 4.09%

For 2019: $440000/8200000 = 5.36%

Reurn on Assets = Net income/ Average assets

For 2018: Average assets = Opening assets +closing assets /2 = $3088000+$2891000/2 = $2989500

Return on assets = $270000/ 2989500= 0.9%

For 2019: Average assets = $2999000+$3088000/2= $3043500

Return on assets = $440000/3043500= 14.45%

Asset Turnover ratio= Sales / Average assets

For 2018: $6600000/2989500= 2.2

For 2019: $8200000/3043500= 2.69

C) Overall risk measure :

Situation has improved in 2019 based on the risk ratios calculated. Receivables turnover ratio, current ratio and inventory turnover ratios have increased/improved which means firm is taking less time in collecting its receivables, has more current assets than current liabilities and inventory position is also improved. Also, Debt equity ratio is improved which means it has lesser debt obligations.

Overall profitability measure:

We can see that only Gross profit ratio declined in 2019. All other ratios have improved from 2018 to 2019 which means income and profitability has improved. Gross profit ratio decline will be covered by improvement in other profitability ratios. So, overall profitability has increased/improved.

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