Question

Return Ratios and Leverage
The following selected data are taken from the financial statements of Redwood Enterprises:
Sales revenue		$649,000
Cost of goods sold		363,000
Gross profit		$286,000
Selling and administrative expense		100,000
Operating income		$186,000
Interest expense		50,000
Income before tax		$136,000
Income tax expense (40%)		54,400
Net income		$81,600
Accounts payable		$45,000
Accrued liabilities		70,000
Income taxes payable		10,000
Interest payable		25,000
Short-term loans payable		150,000
Total current liabilities		$300,000
Long-term bonds payable		$500,000
Preferred stock, 10%, $100 par		$250,000
Common stock, no par		600,000
Retained earnings		350,000
Total stockholders' equity		$1,200,000
Total liabilities and stockholders' equity		$2,000,000
Required:
1. Compute the following ratios for Redwood Enterprises:
Return on sales
Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.)
Return on assets
Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)
When computing percentage amounts, carry out calculations to four decimal places, but enter your answers to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86.
a. Return on sales	28.66	%	incorrect
b. Asset turnover (round to 2 decimal places)	0.36	times	correct
c. Return on assets	4.53	%	incorrect
d. Return on common stockholders' equity	4.72	%	incorrect

Answer 1

Req a. Return on Sales = Net income after tax/ Net sales *100
		($81600 / $649000) *100 = 12.57%
Req B: Total Assets Turnover ratio: Net sales/ Average total assets
Average Total Assets (1600,000+2000,000)/2 = $1800,000
Total Assets trunover ratio= $649000/1800,000 = 0.36 times
Rreq C: Return on Assets: Net income after tax/ Average total assets*100
		($81600/1800,000)*100 =4.525%
Req D: Return on Common Stockholder' equity: Net income after prefered dividend/ Average Common Stockholder' equity
Net Income aftere preferred dividend: $81600- $25000 (preferred dividend) = $56,600
Closing Stockholder's equity: $ 600,000+$350,000 = $950,000
Beginning Stockholder' equity: $600,000+$350,000 -$56,600 = $893,400
Average Common Equity: (950000+893400)/2 = $921,700
Return on Common Stockholder' equity: $ 56,600 /921700 *100 = 614%