Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	22,000
Accounts receivable, net					240,000
Merchandise inventory					330,000
Prepaid expenses					8,000
Total current assets					600,000
Property and equipment, net					900,000
Total assets				$	1,500,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	210,000
Bonds payable, 10%					360,000
Total liabilities					570,000
Stockholders’ equity:
Common stock, $5 par value				$	110,000
Retained earnings					820,000
Total stockholders’ equity					930,000
Total liabilities and stockholders' equity				$	1,500,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,200,000
Cost of goods sold		1,220,000
Gross margin		980,000
Selling and administrative expenses		650,000
Net operating income		330,000
Interest expense		36,000
Net income before taxes		294,000
Income taxes (30%)		88,200
Net income	$	205,800

Account balances at the beginning of the year were: accounts receivable, $170,000; and inventory, $360,000. All sales were on account. Assets at the beginning of the year totaled $1,000,000, and the stockholders’ equity totaled $665,000.

Required:

Compute the following:

Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

      

Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

        

Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

	Was financial leverage positive or negative for the year?
	Positive Negative

Answer 1

1)	Gross Profit Margin = Gross Profit / Sales
	= $980000/2200000
	=44.55 %
2)	Profit Margin = Net Income / Sales
	= $205800/2200000
	=9%
3)	Average Assets = (beginning Assets + ending Assets)/2
	= ( $1000000+1500000)/2
	= $ 1250000
	Return On Assets = Net Income / Average Assets
	= $205800/1250000
	=16.5 %
4)	Average Stockholders Equity = (beginning Stockholders Equity + ending Stockholders Equity)/2
	= ( $665000+930000)/2
	= $ 797500
	Return On Stockholders Equity = Net Income / Average Stockholders Equity
	= $205800/797500
	=25.8 %
5)	Financial leverage = debt / equity
	=570000/930000
	=0.61
	Positive.