Question

Problem 12-4A Calculate risk ratios (L012-3) The following income statement and balance sheets for Virtual Gaming Systems are provided. VIRTUAL GAMING SYSTEMS Income Statement For the year ended December 31, 2018 Net sales Cost of goods sold $3,066,000 1,956,000 1.110,000 Gross profit Expenses Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense $864.000 30,000 8,600 18,000 54,000 Total expenses 974,600 Net income $ 135.400

(use 365 days a year. Round your intermediate calculations and final answers to 1 decimal place.)

Answer 1

Ans. 1	Receivables turnover = Net sales / Average accounts receivables
	$3,066,000 / $76,500
	40.1	times
	*Average receivables = (Beginning receivables + Ending receivables) / 2
	($66,000 + $87,000) / 2
	$76,500
Ans. 2	Average collection period = No. of days in year / Receivable turnover ratio
	365 / 40.1
	9.1	days
Ans. 3	Inventory turnover = Cost of goods sold / Average Inventory
	$1,956,000 / $126,000
	15.5	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	($141,000 + $111,000) / 2
	$126,000
Ans. 4	Average days in inventory = No. of days in year / Inventory turnover
	365 / 15.5
	23.5	days
Ans. 5	*Calculations for total current assets:
	Assets:	2018
	Cash	$192,000
	Accounts receivables	$87,000
	Inventory	$111,000
	Prepaid rent	$12,600
	Total current assets	$402,600
	*Calculations for total current liabilities:
	Assets:	2018
	Accounts payable	$72,000
	Interest payable	$7,200
	Income tax payable	$18,000
	Total current liabilities	$97,200
	Current ratio   =   Total current assets / Total current liabilities
	$402,600 / $97,200
	4.1 : 1
Ans. 6	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	($402,600 - $111,000 - $12,600) / $97,200
	$279,000 / $97,200
	2.9 : 1
Ans. 7	*Calculations for total liabilities:
		2018
	Total current liabilities	$97,200
	Add: Long term notes payable	$291,000
	Total liabilities	$388,200
	*Calculation of total stockholder's equity:
		2018
	Common stock	$306,000
	Retained earnings	$233,400
	Total Equity (d)	$539,400
	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
	$388,200 / $539,400
	0.72 : 1	(or 0.7 )
Ans. 8	*Calculation of income before interest and taxes:
		2018
	Gross profit	$1,110,000
	Operating expense	-$864,000
	Depreciation expense	-$30,000
	Loss on sale of land	-$8,600
	Income before interest and taxes	$207,400
	Time interest earned = Income before interest and taxes / Interest expenses
	$207,400 / $18,000
	11.5 times