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Exercise 13-10 Efficiency and profitability analysis LO P3

[The following information applies to the questions displayed below.]

Simon Company’s year-end balance sheets follow.

At December 31	2017			2016			2015
Assets
Cash	$	32,200		$	35,000		$	37,400
Accounts receivable, net		86,100			63,500			50,500
Merchandise inventory		112,000			82,400			53,500
Prepaid expenses		10,550			9,400			4,800
Plant assets, net		278,000			249,500			229,000
Total assets	$	518,850		$	439,800		$	375,200
Liabilities and Equity
Accounts payable	$	128,400		$	74,250		$	50,400
Long-term notes payable secured by mortgages on plant assets		95,500			98,250			81,400
Common stock, $10 par value		163,000			163,000			163,000
Retained earnings		131,950			104,300			80,400
Total liabilities and equity	$	518,850		$	439,800		$	375,200

The company’s income statements for the years ended December 31, 2017 and 2016, follow.

For Year Ended December 31	2017						2016
Sales				$	745,000					$	560,000
Cost of goods sold	$	447,000					$	358,400
Other operating expenses		223,500						128,800
Interest expense		12,200						12,600
Income taxes		9,500						8,500
Total costs and expenses					692,200						508,300
Net income				$	52,800					$	51,700
Earnings per share				$	3.24					$	3.17

Evaluate the company's efficiency and profitability by computing the following for 2017 and 2016.

(1) Profit margin ratio

Profit Margin Ratio
	Choose Numerator:	/	Choose Denominator:	=	Profit Margin Ratio
		/		=	Profit margin ratio
2017		/		=		%
2016		/		=		%

(2) Total asset turnover.

Total Asset Turnover
	Choose Numerator:	/	Choose Denominator:	=	Total Asset Turnover
		/		=	Total asset turnover
2017		/		=		times
2016		/		=		times

3) Return on total assets.

Return On Total Assets
	Choose Numerator:	/	Choose Denominator:	=	Return On Total Assets
		/		=	Return on total assets
2017		/		=		%
2016		/		=		%

Answer 1

1) Profit margin ratio

	Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit Margin Ratio Net Income / Sales = Profit margin ratio 2017 $52,800 / $745,000 = 7.09 % 2016 $51,700 / $560,000 = 9.23 %

(2) Total asset turnover.

	Total Asset Turnover Choose Numerator: / Choose Denominator: = Total Asset Turnover Sales / Average Total Assets = Total asset turnover 2017 $745,000 / ($518,850 + $439,800)/2 = 1.55 times 2016 $560,000 / ($439,800 + $375,200)/2 = 1.37 times

3) Return on total assets.

	Return On Total Assets Choose Numerator: / Choose Denominator: = Return On Total Assets Net Income / Average Total Assets = Return on total assets 2017 $52,800 / ($518,850 + $439,800)/2 = 11.02 % 2016 $51,700 / ($439,800 + $375,200)/2 = 12.69 %