Question

Analysis of Profitability

Based on the financial statements of Cowan Kitchen Counters, Inc., as shown below:

Cowan Kitchen Counters, Inc. Comparative Income Statement For Years Ended December 31, 20-2 and 20-1
	20-2		20-1
Net Sales (all on account)		$2,575,700		$2,167,000
Cost of goods sold		1,858,300		1,623,300
Gross profit		$717,400		$543,700
Operating expenses		318,000		226,600
Other expense (interest)		24,200		24,200
Income tax expense		173,300		108,600
Net income		$201,900		$184,300

Cowan Kitchen Counters, Inc. Comparative Balance Sheet December 31, 20-2 and 20-1
	20-2		20-1
Cash		$258,700		$240,800
Government notes		248,300		248,300
Accounts receivable (net)		900,900		796,800
Merchandise inventory		985,100		913,500
Supplies and prepayments		147,300		49,300
Land		109,400		109,400
Building (net)		331,100		389,500
Office equipment (net)		17,900		15,300
Total assets		$2,998,700		$2,762,900
Current liabilities (accounts payable)		$696,500		$533,100
Bonds payable		220,000		240,000
Total liabilities		$916,500		$773,100
Common stock ($10 par, 180,000 shares)		$1,800,000		$1,800,000
Retained earnings		282,200		189,800
Total stockholders' equity		$2,082,200		$1,989,800
Total liabilities and stockholders' equity		$2,998,700		$2,762,900

Compute the following profitability measures for 20-2 (round all calculations to two decimal places):

a. Profit margin ratio		%
b. Return on assets		%
c. Return on common stockholders' equity		%
d. Earnings per share of common stock	$

Answer 1

a) Profit margin ratio = Net Income / Net Sales
Profit Margin Ratio (20-2) = $201,900 / $2,575,700
Profit margin Ratio = 7.84%

b) Return on Total Assets = Net Income / Average Assets
Average Assets = (Opening Total Assets + Closing Total Assets) / 2
Average Assets = (2,762,900 + 2,998,700) / 2 = $2,880,800
Return on Assets = $201,900 / $2,880,800

Return on Assets = 7%

c) Return on Common Stockholders' Equity = Net Income / Average Common Stockholders' Equity

Average Common Stockholders' Equity = +Opening Common Stockholders' Equity + Closing Common Stockholders' Equity ) / 2

Average Common Stockholders' Equity = ($1,989,800 + $2,082,200) / 2

Average Common Stockholders' Equity = $2,036,000

Return on Common Stockholders' Equity = $201,900 / $2,036,000
Return on Common Stockholders' Equity = 9.92%

d) Earnings Per Share of common stock = Net Income / No. Of Common Stock Shares

No. of Common Stock Shares = 180,000 Shares

Earnings per share of Common Stock = $201,900 / 180,000

Earnings per share of Common Stock = $1.12

Hence,

a) Profit margin Ratio = 7.84%
b) Return on Assets = 7%
c) Return on Common Stockholders' Equity = 9.92%
d) Earnings per share of Common Stock = $1.12