Question

The adjusted trial balance of Foster Products Company included the following balances for 12- 31-15, which was the first year of operations

Accounts Payable $ 18000

Accumulated Depreciation 35000

Advertising Expense 17800

Cash 7400

Common Stock 3000

Cost of Goods Sold 75800

Depreciation Expense 3000

Dividends 2000

Equipment 81800

Insurance

Expense 2800

Interest Revenue 500

Inventory 24000

Prepaid Insurance 3800

Rent Expense 26000

Retained Earnings 40000

Salaries Expense 63000

Sales 226600

Sales Discounts 1000

Sales Returns and Allowances 5000

Supplies 3700

Supplies Expense 6000

________

323100 323100

Rent expense and salaries expense are equally divided between selling activities and general and administrative activities.

Required:

1. Prepare a Multiple Step Income Statement for 12-31-15. (Categorize the Operating Expenses into Selling Expenses and General/Administrative Expenses.

2.Calculate the Following Ratios AND provide a brief interpretation about each one.

a. Return on Assets

b. Gross Margin Ratio

c. Profit Margin

Answer 1

Income statement
Particulars	Amount ($)	Amount ($)
Revenue:
Sales	226,600.00
Less: Sales returns and allowances	5,000.00
Net sales		221,600.00
Less: Cost of goods sold		75,800.00
Gross profit		145,800.00
Add: Interest revenues:		500.00
(A): Revenue before deducting expenditures		146,300.00
Expenditures:
Salaries expenses	63,000.00
Supplies expenses	6,000.00
Rent expense	26,000.00
Insurance	2,800.00
Sales discount	1,000.00
Depreciation expense	3,000.00
Advertisement expenditures	17,800.00
(B): Total expenditures		119,600.00
Income before tax (A-B)		26,700.00
Less: Income tax @40% assuming		10,680.00
Profit after tax		16,020.00

All ratios are in percentages (%):

Return on assets (Net income x 100/ Total assets)
Total assets
cash	7,400.00
Equipment	81,800.00
Inventory	24,000.00
Prepaid insurance	3,800.00
Total assets	117,000.00
Profit after tax	16,020.00
Return on assets (Net income x 100/ Total assets)	13.69
Gross profit margin (Gross profit x 100/ Net sales)
Gross profit	145,800.00
Net Sales	221,600.00
Gross profit margin (Gross profit x 100/ Net sales)	65.79
Profit margin (Net income x 100/ Net sales)
Net income	16,020.00
Net Sales	221,600.00
Profit margin (Net income x 100/ Net sales)	7.23