Sample Test Problem 4.03 Carla Vista Corporation recently filed the following fi

Question

Sample Test Problem 4.03 Carla Vista Corporation recently filed the following financial statements with the SEC. Carla Vista Corporation Income Statement for the Fiscal Year Ended July 31, 2017 Net sales Cost of products sold Gross profit Selling, general, and administrative expenses 10,640 Depreciation Operating income (loss) Interest expense Earnings (loss) before income taxes Income taxes Net earnings (loss) $83,489 59,385 $24,104 1,208 $12,256 740 $11,516 4,031 $7,485 Carla Vista Corporation Balance Sheet as of July 31, 2017

Explanation / Answer

Solution :

a. Net profit margin            

The formula for calculating net profit margin is as follows:

= Net Income / Net sales

= $ 7,485 / $ 83,489 = 0.089653 = 8.9653 %

= 8.97 % (when rounded off to two decimals)

Thus, the Net profit margin = 8.97 % .

b. Total asset Turnover

The formula for calculating total asset turnover is as follows:

= Net sales / Total assets

= $ 83,489 / $ 99,783 = 0.8367

= 0.84   (when rounded off to two decimals)

Thus the total asset turnover = 0.84 .

c. Equity multiplier

The formula for calculating equity multiplier is as follows:

= Total assets / Total equity

= $ 99,783 / $ 21,355 = 4.6726

= 4.67 (when rounded off to two decimals)

Thus, the Equity multiplier = 4.67 .

d. EBIT Return on assets

The formula for calculating EBIT Return on assets is as follows:

= EBIT / Total Assets

= $ 12,256 / $ 99,783 = 0.1228

= 12.28 % (when rounded off to two decimals)

Thus the EBIT Return on assets = 12.28 % .

e. Return on assets =        

The formula for calculating return on assets is as follows:

= Net Income / Total assets       

= $ 7,485 / $ 99,783 = 0.0750

= 7.5% (when rounded off to two decimals)

Thus, Return on assets = 7.5 % .

f. Return on equity =

The formula for calculating Return on equity as per the Du pont equation is as follows:

= Net profit margin * Asset Turnover ratio * Equity Multiplier

= 8.97 % * 0.84 * 4.67 = 0.3519 = 0.35 (when rounded off to two decimals)

Thus return on equity as per the Du pont identity / equation =0.35 = 35 %      

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