Question

The following condensed information is reported by Sporting Collectibles.

2018 2017

Income Statement Information Sales revenue $ 14,820,000 $ 9,400,000

Cost of goods sold 9,544,080 6,900,000

Net income 418,000 348,000

Balance Sheet Information Current assets $ 1,700,000 $ 1,600,000

Long-term assets 2,300,000 2,000,000

Total assets $ 4,000,000 $ 3,600,000

Current liabilities $ 1,300,000 $ 1,000,000

Long-term liabilities 1,400,000 1,400,000

Common stock 900,000 900,000

Retained earnings 400,000 300,000

Total liabilities and stockholders' equity $ 4,000,000 $ 3,600,000

Required:

Calculate the following profitability ratios for 2018

Gross profit ratio %
Return on assets %
Profit margin %
Asset turnover times
Return on equity %

Answer 1

Gross profit ratio % = 35.60%

Return on assets % = 10.45%

Profit margin % = 2.82%

Asset turnover times = 3.90 times

Return on equity % = 46.44%

Step-by-step explanation:

a. Gross profit ratio %

Gross profit = Sales revenue - Cost of good sold = $14,820,000 - $9,544,080 = $5,275,920

Gross profit ratio % = (Gross profit / Sales revenue) * 100 = ($5,275,920 / $14,820,000) * 100 = 35.60%

b. Return on assets %

Return on assets % = (Net income / Total assets) * 100 = ($418,000/$4,000,000) * 100 = 10.45%

c. Profit margin %

Profit margin % = (Net income / Sale revenue) * 100 = ($418,000/$14,820,000) * 100 = 2.82%

d. Asset turnover times

Average total asset = ($4,000,000 + $3,600,000) / 2 = $3,800,000

Asset turnover times = Sales revenue / Average total asset = $14,820,000/$3,800,000 = 3.90 times

e. Return on equity %

Return on equity % = (Net income / Common stock) * 100 = ($418,000/$900,000) * 100 = 46.44%