Question

 Selected comparative statement data for Molini Products Company are presented below. All statement of financial position data are as of December 31. 2014 2013

Net sales £700,000 £680,000

Cost of goods sold 480,000 400,000

Interest expense 7,000 5,000

Net income 42,000 34,000

Accounts receivable 120,000 100,000

Inventory 85,000 75,000

Total assets 580,000 540,000

Total ordinary shareholders’ equity 425,000 325,000

Instructions

Compute the following ratios for 2014.

(a) Profi t margin.

(b) Asset turnover.

(c) Return on assets.

(d) Return on ordinary shareholders’ equity

Answer 1

(a) Profit margin £42,000 / £700,000 = 6.0%. Profit Margin = Gross Profit / Revenue x 100

(b) Asset turnover £700,000 / (£540,000 + £580,000 / 2)  = 1.25 times Asset turnover ratio = total sales / average total assets

(c) Return on assets £42,000 / £560,000 = 7.5%.

(d) Return on ordinary shareholders’ equity £42,000 / (£325,000 + £425,000 / 2) = 11.2%.

(a) Profit margin  = 6.0%.

(b) Asset turnover = 1.25 times

(c) Return on assets  = 7.5%.

(d) Return on ordinary shareholders’ equity = 11.2%.