Question

The Year 2 income statement of Company A reports sales of $20,110,000, cost of goods sold of $12,450,000, and net income of $1,860,000. Balance sheet information is provided in the following table.

COMPANY A
Balance Sheets December 31, Year 2 and Year 1
Year 2 Year 1
Assets
Current assets:
Cash $ 780,000 $ 900,000
Accounts receivable 1,700,000 1,160,000
Inventory 2,140,000 1,600,000
Long-term assets 4,980,000 4,380,000
Total assets $ 9,600,000 $ 8,040,000
Liabilities and Stockholders' Equity
Current liabilities $ 2,008,000 $ 1,808,000
Long-term liabilities 2,472,000 2,548,000
Common stock 2,000,000 1,960,000
Retained earnings 3,120,000 1,724,000
Total liabilities and stockholders' equity $ 9,600,000 $ 8,040,000

Calculate the five profitability ratios listed above for Company A.

Answer 1

Gross profit ratio = 38.1%

Return on assets = 19.4%

Profit Margin = 15.5%

Asset turnover = 2.3 times

Return on equity = 156%

Step-by-step explanation:

Gross profit ratio

Gross profit ratio = Gross Profit / Net Sales

Gross Profit = Net Sales - Cost of Goods Sold

Gross Profit = $20,110,000 - $12,450,000 = $7,660,000

Gross profit ratio = $7,660,000 / $20,110,000

Gross profit ratio = 38.1%

Return on assets

Return on assets = Operating Income / Total Assets

Operating Income = $1,860,000

Total Assets = $9,600,000

Return on assets = $1,860,000 / $9,600,000

Return on assets = 19.4%

Profit margin

Profit margin = Net Profit / Revenue

Net Profit = $3,120,000

Profit margin = $3,120,000 / $20,110,000

Profit Margin = 15.5%

Asset turnover

Asset turnover = Net Sales / Average Total Assets

Average Total Assets = (Year 1 Total Assets + Year 2 Total Assets) / 2

Average Total Assets = ($9,600,000 + $8,040,000) / 2

Average Total Assets = $17,640,000 / 2

Average Total Assets = $8,820,000

Asset turnover = $20,110,000 / $8,820,000

Asset turnover = 2.3 times

Return on equity

Return on equity = Net Income / Equity

Return on equity = $3,120,000 / $2,000,000

Return on equity = 156%