Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	24,000
Accounts receivable, net		230,000
Merchandise inventory		300,000
Prepaid expenses		12,000
Total current assets		566,000
Property and equipment, net		840,000
Total assets	$	1,406,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	270,000
Bonds payable, 9%		320,000
Total liabilities		590,000
Stockholders’ equity:
Common stock, $5 per value	$	110,000
Retained earnings		706,000
Total stockholders’ equity		816,000
Total liabilities and stockholders’ equity	$	1,406,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,200,000
Cost of goods sold		1,230,000
Gross margin		970,000
Selling and administrative expenses		620,000
Net operating income		350,000
Interest expense		28,800
Net income before taxes		321,200
Income taxes (30%)		96,360
Net income	$	224,840

Account balances at the beginning of the year were: accounts receivable, $220,000; and inventory, $310,000. All sales were on account. Assets at the beginning of the year totaled $1,080,000, and the stockholders’ equity totaled $645,000.

Required:

Compute the following: (For Requirements 1 to 4, enter your percentage answers rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

1. Gross margin percentage.

2. Net profit margin percentage.

3. Return on total assets.

4. Return on equity.

5. Was financial leverage positive or negative for the year?

Answer 1

1. Gross margin percentage = Gross margin/Sales = $970,000/$2,200,000 = 44.09%

2. Net profit margin percentage = Net income/Sales = $224,840/$2,200,000 = 10.22%

3. Return on total assets = Net income/Average total assets

Average total assets = ($1,080,000 + $1,406,000)/2 = $2,486,000/2 = $1,243,000

Return on total assets = $224,840/$1,243,000 = 18.09%

4. Return on equity = Net income/Average stockholders’ equity

Average stockholders’ equity = ($645,000 + $816,000)/2 = $1,461,000/2 = $730,500

Return on equity = $224,840/$730,500 = 30.78%

5. Financial leverage was Positive.