Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	23,000
Accounts receivable, net		190,000
Merchandise inventory		330,000
Prepaid expenses		8,000
Total current assets		551,000
Property and equipment, net		820,000
Total assets	$	1,371,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	290,000
Bonds payable, 9%		350,000
Total liabilities		640,000
Stockholders’ equity:
Common stock, $5 par value	$	180,000
Retained earnings		551,000
Total stockholders’ equity		731,000
Total liabilities and stockholders’ equity	$	1,371,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,150,000
Cost of goods sold		1,180,000
Gross margin		970,000
Selling and administrative expenses		590,000
Net operating income		380,000
Interest expense		31,500
Net income before taxes		348,500
Income taxes (30%)		104,550
Net income	$	243,950

Account balances at the beginning of the year were: accounts receivable, $160,000; and inventory, $350,000. All sales were on account. Assets at the beginning of the year totaled $1,030,000, 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?

1.	Gross margin percentage		%
2.	Net profit margin percentage		%
3.	Return on total assets		%
4.	Return on equity		%
5.	Financial Leverage

Answer 1

	Ratio	Calculation
Gross Margin(Gross Margin / Sales)	45.12%	$970,000/$2,150,000
Net Profit Margin(Net Income / Sales)	11.35%	$243,950/$2,150,000
Return on Total Assets =Net Income / Average Total Assets	20.32%	[$243,950/($1,030,000+$1,371,000)/2]
Return on equity =Net income / Average Stockholder's equity	35.46%	[$243,950/($645,000+$731,000)/2]
Financial Leverage =Total Debt / Total shareholders equity	87.55%	$640,000/$731,000