The financial statements for Castile Products, Inc., are given below: Castile Pr

Question

The financial statements for Castile Products, Inc., are given below: Castile Products, Inc. Balance Sheet December 31 Assets Current assets: Cash $ 22,000 Accounts receivable, net 210,000 Merchandise inventory 330,000 Prepaid expenses 8,000 Total current assets 570,000 Property and equipment, net 900,000 Total assets $ 1,470,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 210,000 Bonds payable, 10% 350,000 Total liabilities 560,000 Stockholders’ equity: Common stock, $5 par value $ 190,000 Retained earnings 720,000 Total stockholders’ equity 910,000 Total liabilities and stockholders' equity $ 1,470,000 Castile Products, Inc. Income Statement For the Year Ended December 31 Sales $ 2,180,000 Cost of goods sold 1,200,000 Gross margin 980,000 Selling and administrative expenses 610,000 Net operating income 370,000 Interest expense 35,000 Net income before taxes 335,000 Income taxes (30%) 100,500 Net income $ 234,500 Account balances at the beginning of the year were: accounts receivable, $170,000; and inventory, $330,000. All sales were on account. Assets at the beginning of the year totaled $1,060,000, and the stockholders’ equity totaled $645,000. Required: Compute the following:

1. Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

2. Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

3. Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

4. Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Explanation / Answer

1. Gross Margin Percentage = (Net sales - Cost of goods sold) / Net sales

Hence = ($ 2,180,000 - 1,200,000) / $ 2,180,000 = 44.95%

2. Net Profit Margin Percentage = (Net profits / Net sales) x 100

Hence = ($ 234,500/$ 2,180,000)*100 = 10.75%

3. Return on Total Assets = Net Income/Average Total Assets

Hence = Net Income =$ 234,500; Average Total Assets = $ 1,470,000+$1,060,000/2

Therefore Return on total assets = $ 234,500/12,65,000 = 18.53

4. Return on Equity = Annual Net Income/Average Stockholders' Equity

Hence Net Income = $ 234,500; Average Stockholders' Equity = $645,000+910,000/2 = 777,500.

Therefore Return on Equity = $ 234,500 / 777,500 = 30.16

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