The 2021 income statement of Adrian Express reports sales of $19,310,000, cost of goods sold of $12,250,000, and net income of $1,700,000. Balance sheet information is provided in the following table. ADRIAN EXPRESS Balance Sheets December 31, 2021 and 2020 2021 2020 Assets Current assets: Cash $ 700,000 $ 860,000 Accounts receivable 1,600,000 1,100,000 Inventory 2,000,000 1,500,000 Long-term assets 4,900,000 4,340,000 Total assets $ 9,200,000 $ 7,800,000 Liabilities and Stockholders' Equity Current liabilities $ 1,920,000 $ 1,760,000 Long-term liabilities 2,400,000 2,500,000 Common stock 1,900,000 1,900,000 Retained earnings 2,980,000 1,640,000 Total liabilities and stockholders' equity $ 9,200,000 $ 7,800,000 Industry averages for the following four risk ratios are as follows: Average collection period 25 days Average days in inventory 60 days Current ratio 2 to 1 Debt to equity ratio 50% Required: 1. Calculate the four risk ratios listed above for Adrian Express in 2021. (Use 365 days in a year. Round your answers to 1 decimal place.) 2. Do you think the company is more risky or less risky than the industry average

1. The Calculation of the four risk ratios for Adrian Express in 2021 is as follows:

a. Average Collection Period = Average Accounts Receivable/Net Sales x 365

= $1,350,000/$19,310,000 x 365

= 25.5 days

b. Average Days in Inventory = Cost of Goods Sold/Average Inventory

= 365 / 9.1

= 40.1 days

c. Current Ratio = Current Assets/Current Liabilities

= $4,300,000/$1,920,000

= 2.2 : 1

d. Debt to Equity Ratio =  Total liabilities/Total Equity x 100

= 88.5% ($4,320,000 /$4,880,000 x 100)

2. Adrian Express is riskier than the industry average, especially with respect to its Debt to Equity Ratio because it appears highly leveraged.

                                        Industry Averages     Adrian Express

Average collection period        25 days                   25.5 days

Average days in inventory        60 days                   40.1 days

Current ratio                               2 : 1                          2.2 : 1

Debt to equity ratio                   50%                          88.5%

Data and Calculations:

Adrian Express

Income Statement

Sales Revenue       $19,310,000

Cost of goods sold 12,250,000

Net income              $1,700,000

ADRIAN EXPRESS

Balance Sheets

December 31, 2021 and 2020

                                                       2021              2020

Assets

Current assets: Cash               $ 700,000     $ 860,000

Accounts receivable                1,600,000        1,100,000

Inventory                                2,000,000      1,500,000

Current Assets                    $4,300,000   $3,460,000

Long-term assets                   4,900,000      4,340,000

Total assets                        $ 9,200,000   $ 7,800,000

Liabilities and Stockholders' Equity

Current liabilities              $ 1,920,000  $ 1,760,000

Long-term liabilities              2,400,000    2,500,000

Total liabilities                   $4,320,000  $4,250,000

Common stock                      1,900,000     1,900,000

Retained earnings               2,980,000      1,640,000

Total Equity                      $4,880,000  $3,540,000

Total Liabilities & Equity $ 9,200,000  $ 7,800,000

Average Accounts Receivable = $1,350,000 ($1,600,000 + $1,100,000)

Average Inventory = $1,750 ($2,000,000 + $1,500,000)

Inventory Turnover = 9.1 times ($12,250,000/$1,350,000)

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1.

Average Collection Period = 25.2 Days

Average Days In Inventory = 52.1 days

Current Ratio = 2.2 to 1

Debt to Equity Ratio = 88.5%

2.

The above ratios shows that Adrian Express is more risky than the Industry Average due to Debt to Equity Ratio which is worse than 50% of Industry Average, although the rest 3 ratios are much closer to industry average.

Explanation:

The Average Collection Period is greater than the market average hence worse.

The Average Days in Inventory is less than the Industry average hence good.

Current Ratio is greater than Industry Average hence the Adrian Express is risky.

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Debt To Equity Ratio is greater than Industry Average, hence Adrian Express is risky as compared to Industry Average.

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