Question

The following income statement and balance sheets for Laser World are provided:

LASER WORLD Income Statement For the year ended December 31, 2018
Sales revenue	$ 2,380,400
Cost of goods sold	1,560,000
Gross profit	820,400
Expenses:
Operating expenses	343,000
Depreciation expense	61,000
Loss on sale of land	4,400
Interest expense	22,000
Income tax expense	54,000
Total expenses	484,400
Net income	$   336,000

LASER WORLD Balance Sheet December 31
	2018		2017
Assets
Current assets:
Cash	$	128,000	$	109,000
Accounts receivable		92,000		75,000
Inventory		170,000		150,000
Prepaid rent		12,000		12,000
Long-term assets:
Land		350,000		290,000
Equipment		410,000		290,000
Accumulated depreciation		(76,000)		(43,000)
Total assets	$	1,086,000	$	883,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	54,000	$	78,000
Interest payable		8,800		7,800
Income tax payable		15,300		12,600
Long-term liabilities:
Notes payable		450,000		350,000
Stockholders' equity:
Common stock		240,000		240,000
Retained earnings		317,900		194,600
Total liabilities and equity	$	1,086,000	$	883,000

  

Earnings per share for the year ended December 31, 2018, is $1.40. The closing stock price on December 31, 2018, is $31.00.

Calculate the following profitability ratios for 2018 (Do not round intermediate calculations. Round your answers to 1 decimal place.):

Gross profit ratio

Return on assets

Profit margin

Asset turnover

Return on equity

Price-earnings ratio

Answer 1

(a)Gross Profit Ratio

Gross Profit Ratio = (Gross Profit / Net Sales Revenue) * 100

= [$8,20,400 / $23,80,400 ] x 100

= 34.46%

(b) Return on assets

= [ Net Income / Average Total Assets ] x 100

= $336000 / [ (1086000 + 883000) / 2 ] x 100

= [ $336000 / 984500 ] x 100

= 34.13%

(c) Profit margin

= [ Net Income / Sales ] x 100

= [ 336000 / 2380400 ] x 100

= 14.12%

(e) Asset turnover

= [ Sales / Average Total Assets ] x 100

= [ $2380400 / (1086000 + 883000) / 2 ]

= $2380400 / 984500

= 2.42

(f) Return on equity

= [ Net Income / Stockholders' equity] x 100

={ $336000 / 557900 ] x 100

= 60.23%

(g) Price-earnings ratio

= Market Price / Earnings Per Share

= $31 / 1.40

= 22.14 Times