Question

Supply Company reported the following information in its comparative financial statements for the fiscal year ended January​ 31.

January 31 January 31
2018 2017
Net sales $91,000 $89,500
Net earnings $6,370 $6,220
Average total assets $65,000 $64,400
Requirement
1. Compute net profit margin ratio​ (%) for the years ended January​ 31, and 2017. Did it improve or worsen in ​2018?
2. Compute asset turnover for the years ended January 31, 2018 and 2017. Did improve or worsen in 2018? 2018 2017 91,000 $ 89,500 Net sales
3. Compute return on assets for the years ended January 31, 2018 and 2017. Did it improve or worsen in 2018? Which component-net profit margin ratio or asset turnover-was mostly responsible for the change in the company's return on assets?

Answer 1

Answer: See explanation

Step-by-step explanation:

1. Net profit margin ratio​ (%) for 2017 will be:

= Net income/Net sales

= 6220/89500

= 0.0695

= 6.95%

Net profit margin ratio​ (%) for 2018 will be:

= Net income/Net sales

= 6370/91000

= 0.07

= 7%

An improvement of (7% - 6.95%) = 0.05% occurs in net profit.

2. Asset turnover for the year ended 2017 will be:

Net sales/Average total assets

= 89500/64400

= 1.39

= 139%

Asset turnover for the year ended 2018 will be:

Net sales/Average total assets

= 91000/65000

= 1.4

= 140%

There's an improvement in the asset turnover in 2018.

3. Return on assets for 2017 will be:

= Net income/Average total asset

= 6220/64400

= 9.66%

Return on assets for 2018 will be:

= Net income/Average total asset

= 6370/65000

= 9.80%

An improvement in return on total assets of (9.80% - 9.66%) = 0.14% occurs.

Both component-net profit margin ratio or asset turnover- are responsible for the change in the company's return on assets.