Question

Financial statements for Askew Industries for 2021 are shown below (in thousands):

2021 Income Statement
Net sales ....................................$ 9,000
Cost of goods sold .....................(6,300)
Gross profit .................................2,700
Operating expenses .................(2,100)
Interest expense .........................(200)
Income tax expense ...................(100)
Net income ................................$ 300

 

Required:
Calculate the following ratios for 2021.
1. Inventory turnover ratio
2. Average days in inventory
3. Receivables turnover ratio
4. Average collection period
5. Asset turnover ratio
6. Profit margin on sales
7. Return on assets
8. Return on equity
9. Equity multiplier
10. Return on equity (using the DuPont framework)

Answer 1

1.  Inventory turnover ratio                   $6,300 ÷ [($800 + 600) ÷ 2] = 9.0

 

2.  Average days in inventory                     365 ÷ 9.0 = 40.56 days

 

3.  Receivables turnover ratio                $9,000 ÷ [($600 + 400) ÷ 2] = 18.0

 

4.  Average collection period                      365 ÷ 18.0 = 20.28 days

 

5.  Asset turnover ratio                         $9,000 ÷ [($4,000 + 3,600) ÷ 2] = 2.37

 

6.  Profit margin on sales                          $300 ÷ $9,000 = 3.33%

 

7.  Return on assets                                      $300 ÷ [($4,000 + 3,600) ÷ 2] = 7.89%

      or:                                                         3.33% × 2.37 times = 7.89%

 

8.  Return on equity                                 $300 ÷ [($1,500 + 1,350) ÷ 2] = 21.1%

 

9.  Equity multiplier                                         [($4,000 + 3,600) ÷ 2] ÷ [($1,500 + 1,350) ÷ 2] = 2.67

 

10. DuPont framework                                   3.33% × 2.37 × 2.67 = 21.1%

DuPont framework                                   3.33% × 2.37 × 2.67 = 21.1%