In: Accounting
The financial statements for Castile Products, Inc., are given below: |
Castile Products, Inc. Balance Sheet December 31 |
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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 |
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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 beentered as 12.3).) |
Was financial leverage positive or negative for the year? | |||||
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1) Gross margin percentage is calculated as follows:
Gross margin percentage = Gross margin / Sale * 100
= $ 980,000 / $ 2,200,000 *100
= 44.55%
2) Net profit margin percentage is calculated as follows:
Net profit margin percentage = Net profit margin / Sale * 100
= $ 205,800 / $ 2,200,000 *100
= 9.35%
3) Return on total assets is calculated as follows:
Return on total assets = Earning Before Interest Tax(Operating Income) / Average Total Assets *100
Average Total Assets = Total Assets Begining + Total Assets Ending / 2
= ( $1,000,000 + $1,500,000 )/2
= $1,250,000
Return on total assets = $330,000 / $1,250,000 *100
= 26.40%
4) Return on equity is calculated as follows:
Return on equity = (Net Income - Preference Dividend) / Average Sharehoder's Equity
Average Sharehoder's Equity = (Sharehoder's Equity begining + Sharehoder's Equity ending) /2
= ($665,000 + $ 930,000 )/2
= $797,500
Return on equity = ($ 205,800 - $0) / $797,500
= 25.81%
The financial leverage is positive for the year because Return on equity is positive