Question

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

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

Castile Products, Inc.
Balance Sheet
December 31
  Assets
  Current assets:
     Cash $ 20,000
     Accounts receivable, net 170,000
     Merchandise inventory 370,000
     Prepaid expenses 8,000
  Total current assets 568,000
  Property and equipment, net 890,000
  Total assets $ 1,458,000
  Liabilities and Stockholders' Equity
  Liabilities:
     Current liabilities $ 260,000
     Bonds payable, 9% 340,000
  Total liabilities 600,000
  Stockholders’ equity:
     Common stock, $5 par value $ 180,000
     Retained earnings 678,000
  Total stockholders’ equity 858,000
  Total liabilities and stockholders' equity $ 1,458,000
Castile Products, Inc.
Income Statement
For the Year Ended December 31
  Sales $ 2,240,000
  Cost of goods sold 1,190,000
  Gross margin 1,050,000
  Selling and administrative expenses 640,000
  Net operating income 410,000
  Interest expense 30,600
  Net income before taxes 379,400
  Income taxes (30%) 113,820
  Net income $ 265,580

     Account balances at the beginning of the year were: accounts receivable, $150,000; and inventory, $280,000. All sales were on account. Assets at the beginning of the year totaled $1,000,000, and the stockholders’ equity totaled $655,000.

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).)


       

Homework Answers

Answer #1

Answer 1.

Gross Margin Percentage = Gross Margin / Sales
Gross Margin Percentage = $1,050,000 / $2,240,000
Gross Margin Percentage = 46.88%

Answer 2.

Net Profit Margin = Net Income / Sales
Net Profit Margin = $265,580 / $2,240,000
Net Profit Margin = 12%

Answer 3.

Average Total Assets = ($1,000,000 + $1,458,000) / 2
Average Total Assets = $1,229,000

Return on Total Assets = [Net Income + Interest Expense * (1 - tax rate)] / Average Total Assets
Return on Total Assets = [$265,580 + $30,600 * (1 - 0.30)] / $1,229,000
Return on Total Assets = $287,000 / $1,229,000
Return on Total Assets = 23.4%

Answer 4.

Average Stockholders’ Equity = ($858,000 + $655,000) / 2
Average Stockholders’ Equity = $756,500

Return on Equity = Net Income / Average Stockholders’ Equity
Return on Equity = $265,580 / $756,500
Return on Equity = 35.1%

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