Question

Income statements and balance sheets data for Virtual Gaming Systems are provided below.

VIRTUAL GAMING SYSTEMS Income Statements For the year ended December 31
	2019	2018
Net sales	$3,555,000	$3,081,000
Cost of goods sold	2,489,000	1,959,000
Gross profit	1,066,000	1,122,000
Expenses:
Operating expenses	964,000	867,000
Depreciation expense	39,000	31,500
Loss on sale of land	0	8,900
Interest expense	22,500	19,500
Income tax expense	8,900	52,500
Total expenses	1,034,400	979,400
Net income	$    31,600	$   142,600

VIRTUAL GAMING SYSTEMS Balance Sheets December 31
	2019	2018	2017
Assets
Current assets:
Cash	$ 214,500	$195,000	$153,000
Accounts receivable	88,500	90,000	69,000
Inventory	138,500	114,000	144,000
Prepaid rent	14,900	12,900	7,080
Long-term assets:
Investment in bonds	114,000	114,000	0
Land	309,000	219,000	249,000
Equipment	309,000	279,000	219,000
Less: Accumulated depreciation	(121,500)	(82,500)	(51,000)
Total assets	$1,066,900	$941,400	$790,080
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$    118,200	$ 75,000	$134,780
Interest payable	11,700	7,800	3,900
Income tax payable	12,900	19,500	14,900
Long-term liabilities:
Notes payable	490,000	294,000	234,000
Stockholders' equity:
Common stock	309,000	309,000	309,000
Retained earnings	125,100	236,100	93,500
Total liabilities and stockholders’ equity	$1,066,900	$941,400	$790,080

Required:

1. Calculate the following risk ratios for 2018 and 2019: (Round your answers to 1 decimal place.)

2. Calculate the following profitability ratios for 2018 and 2019: (Round your answers to 1 decimal place.)

Answer 1

Common Risk ratios

1) Debt to capital ratio

( Current liabilities + Long term liabilities ) / ( Total debt + Equity )

  Debt to capital ratio for 2018 ,   

( 102300 + 294000 ) / 941400

= 0.42

  Debt to capital ratio for 2019 ,

(142800 + 490000 ) / 1066900

= 0.59

2) Debt to equity ratio

Total Debt / Equity

for 2018 396300 / 545100 = 0.72

for 2019 632800/ 434100 = 1.4

3) Interest coverage ratio

EBIT / Interest expense

for 2018 286500 / 19500 = 14.6

for 2019 141000 / 22500 = 6.2

4) Financial leverage ratio

Assets / Equity

for 2018 941400/ 545100 = 1.7

for 2019 941400 / 434100 = 2.1

5) Debt to asset ratio

Total debt / Asset

for 2018 396300 / 941400 = 0.42

for 2019 632800 / 941400 = 0.67

Profitability ratios

1) Gross profit margin = Gross profit / sales

For  2018 1122000 / 3081000 = .36

For 2019 1066000 / 3555000 = .29

2) Operating profit = Operating income / Sales

For  2018 255000 / 3081000 = .08

For 2019 102000/ 3555000 = .02

3) Net profit margin = Net income / Sales

For  2018 142600/ 3081000 = .04

For 2019 31600 / 3555000= .0088