Question

Financial statements for Askew Industries for 2021 are shown below in thousands): • 4-12 Calculating ctivity and ofitability ratios L04-10 2021 Income Statement Net sales Cost of goods sold Gross profit Operating expenses Interest expense Income tax expense Net income $9.000 (6,300) 2,700 (2,100) (200) (100) $ 300 Comparative Balance Sheets Dec. 31 2021 2020 Assets Cash Accounts receivable Inventory Property, plant, and equipment (net) $ 600 600 800 2,000 $4,000 $ 500 400 600 2,100 $3,600 Liabilities and Shareholders' Equity Current liabilities Bonds payable Common stock Retained earnings $1,100 1,400 600 900 $4,000 $ 850 1,400 600 750 $3,600 Required: Calculate the following ratios for 2021. 1. Inventory turnover ratio 2. Average days in inventory 3. Receivables turnover ratio 4. Average collection period 5. Asset turnover ratio 6. Profit margin on sales 7. Return on assets 8. Return on equity 9. Equity multiplier 10. Return on equity (using the DuPont framework)

Answer 1

First 5 ratios are being calculated here:

1. Inventory turnover ratio = Cost of the goods sold / Average inventory

where, Average inventory = Beginning inventory + Ending inventory / 2

For 2021:

Ending inventory = $800, Beginning inventory = Ending inventory of previous year = $600

Average inventory = ($800 + $600) / 2 = $1400 / 2 = $700

Cost of the goods sold = $6300

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $6300 / $700 = 9

2 Average days in inventory = 365 / Inventory turnover ratio

For 2021:

Inventory turnover ratio = 9 times ( as computed in point (1) above)

Putting these values in the Average days' in inventory ratio formula, we get,

Average days in inventory = 365 / 9 = 40.56 days

3. Receivable turnover ratio = Sales / Average accounts receivables

where, Average accounts receivables = Beginning accounts receivables + Ending receivables / 2

For 2021:

Beginning accounts receivables = $400, Ending accounts receivables = $600

Average accounts receivables = ($400 + $600) / 2 = $1000 / 2 = $500

Sales = $9000

Putting these values in the receivable turnover ratio formula, we get,

Receivables turnover ratio = $9000 / $500 = 18

4. Average collection period = 365 / Accounts receivable turnover ratio

For 2021:

Accounts receivable turnover ratio = 18 times ( as computed in point (3) above)

Putting these values in the Days' sales in inventory ratio formula, we get,

Average collection period = 365 / 18 = 20.28 days

5. Assets turnover ratio = Net Sales / Average total assets

where, Average total assets = Beginning assets (2020) + Ending assets (2021) / 2

So, Average assets = ($3600 + $4000) / 2 = $7600 / 2 = $3800

Net sales = $9000

Now, putting these values in the above formula, we get,

Assets turnover ratio = $9000 / $3800  = 2.37