Question

In: Accounting

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

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 beentered as 12.3).)


       

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

Solutions

Expert Solution

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


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