The balance sheets for Plasma Screens Corporation and additional information are provided below. PLASMA SCREENS CORPORATION Balance Sheets December 31, 2021 and 2020 2021 2020 Assets Current assets: Cash $ 242,000 $ 130,000 Accounts receivable 98,000 102,000 Inventory 105,000 90,000 Investments 5,000 3,000 Long-term assets: Land 580,000 580,000 Equipment 890,000 770,000 Less: Accumulated depreciation (528,000 ) (368,000 ) Total assets $ 1,392,000 $ 1,307,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 109,000 $ 95,000 Interest payable 7,000 13,000 Income tax payable 9,000 6,000 Long-term liabilities: Notes payable 110,000 220,000 Stockholders' equity: Common stock 800,000 800,000 Retained earnings 357,000 173,000 Total liabilities and stockholders' equity $ 1,392,000 $ 1,307,000 Additional information for 2021: Net income is $184,000. Sales on account are $1,890,000. Cost of goods sold is $1,394,250. Required: 1. Calculate the following risk ratios for 2021:

Answer and Explanation:

The risk ratios are calculated below:

1.  Account Receivable Turnover

= Net credit Sales ÷ Average Accounts Receivable

= $1,890,000 ÷ (($98,000 + $102,000) ÷ 2)

= $1,890,000 ÷ $100,000

= 18.9 times

It shows the relation between the net credit sales and the average account receivable

2. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

= $1394250 ÷ (($105,000 + $90,000) ÷ 2)

= $1,394,250 ÷ $97,500

= 14.3 times

It shows the relation between the cost of goods sold and the average inventory

c.  Current Ratio = Current assets ÷ Current Liabilities

= ($242,000 + $98,000 + $105,000 + $5,000) ÷ ($109,000 + $7,000 + $9,000)

= $450,000 ÷ $125,000

= 3.6 times

It shows the relation between the current assets and the current liabilities

d.  Acid Test Ratio = Liquid assets ÷ Current Liabilities

= ($450,000 - $105,000) ÷ ($125,000 )

= $345,000 ÷ $125,000

= 2.76 times

It shows the relation between the liquid assets which do not involved prepaid assets, inventory, etc and the current liabilities

e. Debt to Equity = Debt ÷ Equity

= ($109,000 + $7,000 + $9,000 + $110,000) ÷  ($800,000  + $357,000 )

= $235,000 ÷ $1,157,000

= 0.203              

It shows the relation between the debt and equity

1.  Account Receivable Turnover

= Net credit Sales ÷ Average Accounts Receivable

= $1,890,000 ÷ (($98,000 + $102,000) ÷ 2)

= $1,890,000 ÷ $100,000

= 18.9 times

It represents the relationship between the net credit sales and the average account receivable.

2. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

= $1394250 ÷ (($105,000 + $90,000) ÷ 2)

= $1,394,250 ÷ $97,500

= 14.3 times

It represents the relationship between the cost of goods sold and the average inventory.

c.  Current Ratio = Current assets ÷ Current Liabilities

= ($242,000 + $98,000 + $105,000 + $5,000) ÷ ($109,000 + $7,000 + $9,000)  

= $450,000 ÷ $125,000  

= 3.6 times

It represents the relationship between the current assets and the current liabilities.

d.  Acid Test Ratio = Liquid assets ÷ Current Liabilities

= ($450,000 - $105,000) ÷ ($125,000 )

= $345,000 ÷ $125,000

= 2.76 times

It represents the relationship between the liquid assets in which it does include prepaid assets, inventory, etc and the current liabilities.

e. Debt to Equity = Debt ÷ Equity

= ($109,000 + $7,000 + $9,000 + $110,000) ÷  ($800,000  + $357,000 )

= $235,000 ÷ $1,157,000

= 0.203              

It represents the relationship between the debt and equity.

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