Chapter 4, Problem 1ALE

a)

Summary Introduction

To determine: Gross profit margin from the given financial information.

Explanation of Solution

Calculation of gross profit:

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}\text{in 2017}=\frac{\text{Sales}-\text{cost}\text{of}\text{goods}\text{sold}}{\text{Sales}}\times 100\\ =\frac{\$3,445,134-\$2,243,232}{\$3,445,134}\times 100\\ =34.89\%\end{array}$

Gross profit margin in 2017 is 34.89%

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}\text{in 2016}=\frac{\text{Sales}-\text{cost}\text{of}\text{goods}\text{sold}}{\text{Sales}}\times 100\\ =\frac{\$3,545,794-\$2,301,181}{\$3,545,794}\times 100\\ =35.10\%\end{array}$

Gross profit margin in 2016 is 35.10 %

b)

Summary Introduction

To determine: Operating profit margin.

Explanation of Solution

Calculation of operating profit margin:

$\begin{array}{c}\text{Operating profit}\text{margin}\text{in 2017}=\frac{\text{Operating}\text{income}}{\text{Sales}}\times 100\\ =\frac{\$338,527}{\$3,545,794}\times 100\\ =9.55\%\end{array}$

Operating profit margin in 2017 is 9.55 %

$\begin{array}{c}\text{Operating profit}\text{margin}\text{in 2016}=\frac{\text{Operating}\text{income}}{\text{Sales}}\times 100\\ =\frac{\$353,579}{\$3,445,134}\times 100\\ =10.26\%\end{array}$

Gross profit margin in 2016 is 10.26 %

c)

Summary Introduction

To determine: Net profit margin.

Explanation of Solution

Calculation of net profit margin:

$\begin{array}{c}\text{Net profit}\text{margin}\text{in 2017}=\frac{\text{Profits}\text{after}\text{taxes}}{\text{Sales}}\times 100\\ =\frac{\$218,120}{\$3,545,794}\times 100\\ =6.15\%\end{array}$

Net profit margin in 2017 is 6.15 %

$\begin{array}{c}\text{Net profit}\text{margin}\text{in 2016}=\frac{\text{Profit}\text{after taxes}}{\text{Sales}}\times 100\\ =\frac{\$224,489}{\$3,445,134}\times 100\\ =6.52\%\end{array}$

Gross profit margin in 2016 is 6.52 %

d)

Summary Introduction

To determine: Times interest earned ratio.

Explanation of Solution

Calculation of times interest earned ratio:

$\text{Times interest earned ratio}=\frac{\text{Operating}\text{income}}{\text{Interest expense}}$

Company has no times interest earned ration because it doesn’t have interest expense.

e)

Summary Introduction

To determine: Return on shareholders’ equity.

Explanation of Solution

Calculation of return on shareholders’ equity:

$\begin{array}{c}\text{Return on shareholders' equity in 2017}=\frac{\text{Profit}\text{after}\text{taxes}}{\text{Total stockholders' equity}}\\ =\frac{\$218,120}{\$1,313,084}\times 100\\ =16.61\%\end{array}$

Return on shareholders’ equity in 2017 is 16.61 %

$\begin{array}{c}\text{Return on shareholders' equity in 2016}=\frac{\text{Profit}\text{after}\text{taxes}}{\text{Total stockholders' equity}}\\ =\frac{\$224,489}{\$1,137,227}\times 100\\ =19.74\%\end{array}$

Return on shareholders’ equity in 2016 is 19.74 %

f)

Summary Introduction

To determine: Return on assets.

Explanation of Solution

Calculation of return on assets:

$\begin{array}{c}\text{Return on assets in 2017}=\frac{\text{Profit}\text{after}\text{taxes}}{\text{Total assets}}\\ =\frac{\$218,120}{\$1,902,673}\times 100\\ =11.46\%\end{array}$

Return on assets in 2017 is 11.46 %

$\begin{array}{c}\text{Return on assets in 2016}=\frac{\text{Profit}\text{after}\text{taxes}}{\text{Total assets}}\\ =\frac{\$224,489}{\$1,833,301}\times 100\\ =12.25\%\end{array}$

Return on assets in 2016 is 12.25 %

g)

Summary Introduction

To determine: Debt-to equity ratio.

Explanation of Solution

Calculation of debt-to-equity ratio:

$\begin{array}{c}\text{Debt-to-equity ratio in 2017}=\frac{\text{Total debt}}{\text{Total stockholders' equity}}\\ =\frac{\$589,553}{\$1,313,084}\\ =0.45\end{array}$

Debt-to-equity ratio in 2017 is 0.45

$\begin{array}{c}\text{Debt-to-equity ratio in 2016}=\frac{\text{Total debt}}{\text{Total stockholders' equity}}\\ =\frac{\$696,074}{\$1,137,227}\\ =0.61\end{array}$

Debt-to-equity ratio in 2016 is 0.61

h)

Summary Introduction

To determine: Days of inventory.

Explanation of Solution

Calculation of days if inventory:

$\begin{array}{c}\text{Days of inventory in 2017}=\frac{\text{Inventory}}{\left(\frac{\text{Cost of goods sold}}{365}\right)}\\ =\frac{\$338,590}{\left(\frac{\$2,301,181}{365}\right)}\\ =53.71\text{days}\end{array}$

Days of inventory in 2017 is 53.71 days

$\begin{array}{c}\text{Days of inventory in 2016}=\frac{\text{Inventory}}{\left(\frac{\text{Cost of goods sold}}{365}\right)}\\ =\frac{\$330,223}{\left(\frac{\$2,243,232}{365}\right)}\\ =53.73\text{days}\end{array}$

Days of inventory in 2016 is 53.73 days

i)

Summary Introduction

To determine: Inventory turnover ratio.

Explanation of Solution

Calculation of inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio in 2017}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$2,301,181}{\$338,590}\\ =6.8\text{times}\text{per}\text{year}\end{array}$

Inventory turnover ratio in 2017 is 6.8 times per year.

$\begin{array}{c}\text{Inventory turnover ratio in 2016}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$2,243,232}{\$330,223}\\ =6.79\text{times}\text{per}\text{year}\end{array}$

Inventory turnover ratio in 2016 is 6.79 times per year.

j)

Summary Introduction

To determine: Average collection period.

Explanation of Solution

Calculation of average collection period:

$\begin{array}{c}\text{Average collection period in 2017}=\frac{\text{Accounts receivable}}{\left(\frac{\text{Total assets}}{365}\right)}\\ =\frac{\$54,505}{\left(\frac{\$3,545,794}{365}\right)}\\ =5.61\text{days}\end{array}$

Average collection period in 2017 is 5.61 days

$\begin{array}{c}\text{Average collection period in 2016}=\frac{\text{Accounts receivable}}{\left(\frac{\text{Total assets}}{365}\right)}\\ =\frac{\$75,723}{\left(\frac{\$3,445,134}{365}\right)}\\ =8.02\text{days}\end{array}$

Average collection period in 2016 is 8.02 days

Based on these financial ratios it is observed that, the financial performance of company is good but flat in the year 2016.