The following selected data are taken from the financial statements of Redwood Enterprises: Sales revenue $641,000 Cost of goods sold 356,000 Gross profit $285,000 Selling and administrative expense 100,000 Operating income $185,000 Interest expense 50,000 Income before tax $135,000 Income tax expense (40%) 54,000 Net income $81,000 Accounts payable $45,000 Accrued liabilities 70,000 Income taxes payable 10,000 Interest payable 25,000 Short-term loans payable 150,000 Total current liabilities $300,000 Long-term bonds payable $500,000 Preferred stock, 10%, $100 par $250,000 Common stock, no par 600,000 Retained earnings 350,000 Total stockholders' equity $1,200,000 Total liabilities and stockholders' equity $2,000,000 Required: 1. Compute the following ratios for Redwood Enterprises: Return on sales Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.) Return on assets Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)
The following selected data are taken from the financial statements of Redwood Enterprises:
| Sales revenue | $641,000 | |
| Cost of goods sold | 356,000 | |
| Gross profit | $285,000 | |
| Selling and administrative expense | 100,000 | |
| Operating income | $185,000 | |
| Interest expense | 50,000 | |
| Income before tax | $135,000 | |
| Income tax expense (40%) | 54,000 | |
| Net income | $81,000 | |
| Accounts payable | $45,000 | |
| Accrued liabilities | 70,000 | |
| Income taxes payable | 10,000 | |
| Interest payable | 25,000 | |
| Short-term loans payable | 150,000 | |
| Total current liabilities | $300,000 | |
| Long-term bonds payable | $500,000 | |
| Preferred stock, 10%, $100 par | $250,000 | |
| Common stock, no par | 600,000 | |
| 350,000 | ||
| Total |
$1,200,000 | |
| Total liabilities and stockholders' equity | $2,000,000 |
Required:
1. Compute the following ratios for Redwood Enterprises:
- Return on sales
- Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.)
- Return on assets
- Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)
When computing percentage amounts, carry out calculations to four decimal places, but enter your answers to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86.
| a. Return on sales | 12 | % |
| b. Asset turnover (round to 2 decimal places) | 0.36 | times |
| c. Return on assets | 4.5 | % |
| d. Return on common stockholders' equity | 4.5 | % |
2. Comment on Evergreen’s use of leverage. Has it successfully employed leverage?
No, Evergreen has not successfully employed leverage because; the return on the stockholders funds is less than the return to all the providers of capital.
Part 1)
Sub Part (1)
Meaning of Return on Sales: -
The return on sales is a ratio used to derive the proportion of profit generated from sales. The concept is useful for determining the ability of management to efficiently generate a profit from a given level of sales. An increasing return indicates an improvement in operating efficiency, while a recurring decline is a strong indicator of impending financial distress..
Formula : Return on Sales = EBIT / Net Sales or Operating Income / Net Sales
Given ,
Operating Income = $185,000
Net Sales = $641,000
Return on Sales = 185000/641000
= 0.2886
= 28.86%.
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
