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ome ?? ?? ?? ???? ?? ??? ?? ?? eagj%? 14% ?6?6???6:44:48 a Chapter 12 Search Textbook Solutions | C x ? Oezio.mbeducation.com hm.tpx Exercise 12-6 Evaluate profitability ratios (LO12-4) The 2018 income statement of Adrian Express reports sales of $19,710,000, cost of goods sold of $12,350,000, and net income of $1,780,000. Balance sheet information is provided an the following table. ADRIAN EXPRESS Balance Sheet December 31, 2018 and 2017 2018 2017 Assets Current assets: Cash $ 740,000 880,000 Accounts receivable Inventory ,650,000 1,130,000 1,550,000 2,070,000 4,940,000 Long-term assets 4,360,000 Total assets $9,400,000 $7,920,000 Liabilities and Stockholders' Equity Current liablities Long-term liabilties Common stock Retained earnings $1,964,000 $1,784,000 2.436.000 2,524,000 1,950,000 1930,000 3,050,000 1,682,000 Total liabilities and stockholders equity $9.400,000 $7,920,000 Industry averages for the following proftability ratios are as follows: Gross profit ratio 45%Explanation / Answer
Requirement - 1
Profitability Ratios
Gross Profit Ratio
37.3%
Return on Asset
20.6%
Profit Margin
9%
Asset Turnover
2.3 Times
Return on Equity
41.3%
Calculations
Gross Profit Ratio
Gross Profit Ratio = [ Gross Profit / Sales ] x 100
= [ $73,60,000 / 197,00,000 ] x 100
= 37.3%
Return on Asset
Return on Asset = [ Net Income / Average Total Assets ] x 100
= [ $17,80,000 / { (94,00,000 + 79,20,000) / 2 } ] x 100
= 20.6%
Profit Margin
Profit Margin = [ Net Income / Sales ] x 100
= [ $17,80,000 / 1,97,10,000 ] x 100
= 9%
Asset Turnover
Asset Turnover = Sales / Average Total Assets
= $1,97,10,000 / { (94,00,000 + 79,20,000) / 2 }
= $197,10,000 / 86,60,000
= 2.3 Times
Return on Equity
Return on Equity = [ Net Income / Average Stockholders Equity ] x 100
Stockholders Equity 2018 = 19,50,000 + 30,50,000 = 50,00,000
Stockholders Equity 2017 = 19,30,000 + 16,82,000 = 36,12,000
Return on Equity = [ $17,80,000 / { (50,00,000 + 36,12,000) / 2 } ] x 100
= [ $17,80,000 / 4306000 ] x 100
= 41.3%
Requirement - 2
“ LESS PROFITABLE “. The company is considered to be less profitable than the industry average
Profitability Ratios
Gross Profit Ratio
37.3%
Return on Asset
20.6%
Profit Margin
9%
Asset Turnover
2.3 Times
Return on Equity
41.3%
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