Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	22,000
Accounts receivable, net					190,000
Merchandise inventory					380,000
Prepaid expenses					11,000
Total current assets					603,000
Property and equipment, net					840,000
Total assets				$	1,443,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	200,000
Bonds payable, 10%					310,000
Total liabilities					510,000
Stockholders’ equity:
Common stock, $10 par value				$	150,000
Retained earnings					783,000
Total stockholders’ equity					933,000
Total liabilities and stockholders' equity				$	1,443,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,170,000
Cost of goods sold		1,260,000
Gross margin		910,000
Selling and administrative expenses		600,000
Net operating income		310,000
Interest expense		31,000
Net income before taxes		279,000
Income taxes (30%)		83,700
Net income	$	195,300

     Account balances at the beginning of the year were: accounts receivable, $180,000; and inventory, $270,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $695,000.

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

Solution :

1. Gross margin percentage. = (Gross margin / Sales ) x 100

= 910,000 / 2,170,000

= 41.93%

2. Net profit margin percentage. = (Net profit / Sales) x 100

= (195,300 / 2,170,000) x 100

= 9%

3. Return on total assets. = (Net Income / Average total assets) x 100

= (195,300 / 1,256,500) x 100

= 15.54%

4. Return on equity = (Net income / Average equity) x 100

= (195,300 / 814,000) x 100

= 23.99%

5. Return on total assets is more than interest on borrowings, hence financial leverage was positive