Working Backward: Profitability Analysis Murphy Company\'s total liabilities on

Question

Working Backward: Profitability Analysis

Murphy Company's total liabilities on December 31, 2014, amounted to $1,465,200. The debt-to-equity ratio on this date was 1.48 to 1. Net income for 2014 was $260,604, and the profit margin was 5.13%.

Required:

1. Determine Murphy's net sales for 2014.

$

2. Determine Murphy's total assets on December 31, 2014.

$

3. Determine Murphy's asset turnover ratio for 2014, using year-end total assets, rather than average total assets. If required, round your answer to one decimal place.

Explanation / Answer

1)

Net sales = Net Income / Profit margin = $260,604 /5.13% = 5,080,000.

Therefore, Net sales = $5,080,000.

2)

Debt = $1,465,200.

Debt / Equity = 1.5/1

$1,465,200 / Equity = 1.5

Equity = $1,465,200/1.5

= $976,800.

Total Assets = Debt + Equity = $1,465,200 + $976,800 =$2,442,000.

Therefore, the total assets on December 31,2014 is $2,442,000.

3)

Asset turnover ratio = Net sales / Total Assets = $5,080,000 / $2,442,000.

= 2.08

Therefore, the asset turnover ratio for 2014 is 2.08.

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