Question

The 2018 income statement of Adrian Express reports sales of $20,510,000, cost of goods sold of $12,550,000, and net income of $1,940,000. Balance sheet information is provided in the following table.

ADRIAN EXPRESS
Balance Sheet
December 31, 2018 and 2017
2018 2017
Assets
Current assets:
Cash $ 820,000 $ 920,000
Accounts receivable 1,750,000 1,190,000
Inventory 2,210,000 1,650,000
Long-term assets 5,020,000 4,400,000

Total assets $ 9,800,000 $ 8,160,000
Liabilities and Stockholders' Equity
Current liabilities $ 2,052,000 $ 1,832,000
Long-term liabilities 2,508,000 2,572,000
Common stock 2,050,000 1,990,000
Retained earnings 3,190,000 1,766,000

Total liabilities and stockholders' equity $ 9,800,000 $ 8,160,000
Industry averages for the following profitability ratios are as follows:
Gross profit ratio 45 %
Return on assets 25 %
Profit margin 15 %
Asset turnover 2.5 times
Return on equity 35 %
Required:Calculate the five profitability ratios listed above for Adrian Express. (Round your answers to 1 decimal place.)

Answer 1

1. Gross profit ratio= Gross Profit/ Sales *100

-Sales $ 20510,000

-Gross Profit = Sales - Cost of Goods Sold =20,510,000 - 12,550,000 = 7,960,000

Gross Profit Ratio= 7,960,000 / 20,510,000 * 100

= 38.81%

2.Return on Assets= Net income after tax / Average Total assets

Where Average Total assets= (9,800,000+8,160,000) / 2= 8,980,000

Where Net income after tax= 1,940,000

Return on Assets = 1,940,000 / 8,980,000 * 100 = 21.60%

3.Profit Margin= Net income/ Sales *100

=1,940,000 /20,510,000 *100

= 9.46%

4. Total Assets turnover= Sales / Average assets

=20,510,000 / 8,980,000

=2.28 times

5 Return on Equity: Net income after tax/ Average stockholder's equity

Where Average Stockholder's equity: (2,050,000 +3,190,000 + 1990000 + 1766000) / 2 = $4498,000

Return on Equity: 1940000/4498,000 *100

= 43.13%