Question

Financial statements for Askew Industries for 2018 are shown below (in $000’s):

2018 Income Statement
Sales	$	8,700
Cost of goods sold		(6,075	)
Gross profit		2,625
Operating expenses		(1,775	)
Interest expense		(110	)
Tax expense		(296	)
Net income	$	444

Comparative Balance Sheets
	Dec. 31
	2018				2017
Assets
Cash	$	510			$	410
Accounts receivable		510				310
Inventory		710				510
Property, plant, and equipment (net)		1,100				1,200
	$	2,830			$	2,430
Liabilities and Shareholders’ Equity
Current liabilities	$	560			$	310
Bonds payable		950				950
Paid-in capital		510				510
Retained earnings		810				660
	$	2,830			$	2,430
Calculate the following ratios for 2018. (Consider 365 days a year. Do not round intermediate calculations and round your final answers to 2 decimal places.)    Inventory turnover ratio Average days in inventory Receivable turnover ratio Average collection period Asset turnover ratio Profit margin on sales Return on assets Return on shareholder’s equity Equity multiplier Return on shareholder’s equity (using DuPont framework)

Answer 1

Ans:

1. Inventory turnover ratio:

Inventory turnover ratio = cost of goods sold/Average inventory

Average inventory = (Opening inventory + Closing inventory)/2

Average inventory = (510+710)/2

Average inventory = $610.

Cost of goods sold = $6,075.

Inventory turnover ratio = $6,075/$610

Inventory turnover ratio = 9.95 times.

2. Average days in inventory:

Average days in inventory = Average inventory/(cost of goods sold/365)

Average days in inventory = $610/($6,075/365)

Average days in invetory = 36.65 days.

3. Receivable turnover ratio:

Receivable turnover ratio = Credit Sales/Average accounts receivables

*Credit sales = $8,700

Average accounts receivables = (Ending receivables + Opening receivables)/2

Average accounts receivables = ($510+$310)/2

Average accounts receivables = $410.

Receivable turnover ratio = $8,700/$410

Receivable turnover ratio = 21.22 times.

*Note: In the absence of information all sales are assumed as credit sales.

4. Average collection period:

Average collection period = Average accounts receivables/Average daily credit sales

Average accounts receivables = $410

Average daily credit sales = Total credit sales/365

Total credit sales = $8,700

Average daily credit sales = $8,700/365

Average daily credit sales = $23.83 per day.

Average collection period = $410/$23.83

Average collection period = 17.20 days.

5. Asset Turnover ratio:

Asset turnover ratio = Sales/Average total assets

Sales = 8,700

Average total assets = (Ending total assets+Opening total assets)/2

Average total assets = ($2,830+$2,430)/2

Average total assets = $2,630.

Asset turnover ratio = $8,700/$2,630

Asset turnover ratio = 3.30 times.

6. Profit margin on sales:

Profit margin on sales = Net income/Sales

Profit margin on sales = $444/$8,700

= 5.10% or 0.051.

7. Return on assets:

Return on assets = Net income/Total assets

Net income = $444

Total assets = $2,830

Return on assets = $444/$2,830

Return on assets = 15.68%.

8. Return on shareholder's equity:

Return on shareholder's equity = Net income/Shareholder's equity

Net income = $444

Shareholder's equity = Paid in capital + Retained earnings = 510+810 = $1,320

Return on shareholder's equiy = $1,320/$510

Return on shareholder's equity = 2.58 times.

9.Equity Multiplier:

Equity multiplier = Total assets/Share holder's equity.

Total assets = $2,830

Shareholder's equity = $1,320.

Equity multiplier = $2,830/$1,320

= 2.14 times

10.Return on Shareholder's equity using Dupont model:

Return on equity = (Net profit margin)(Asset turnover)(Equity multiplier)

Net profit margin = 0.051

Asset turnover = 3.30

Equity multiplier = 2.14

Return on Equity = (0.051)*(3.30)*(2.14)

Return on Equity = 0.36 or 36%

Thank you,

feel free to comment incase of further assistance.