Concept explainers
Ascertain the following ratios of Company M:
- 1. Gross profit margin.
- 2. Operating profit margin.
- 3. Net profit margin.
- 4. Total assets turnover ratio.
- 5. Return on assets ratio.
- 6. Return on common equity.
- 7.
Current ratio . - 8. Inventory turnover ratio.
- 9. Payable ratio.
Explanation of Solution
Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.
Net margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Asset turnover ratio:
The Asset turnover is a contrast to the profit margin ratio and it is calculated to determine the net sales and average total assets. Use the following formula to calculate the asset turnover ratio:
Return on assets:
Return on assets is the ratio of the net income, and interest expense to the average total assets. The
Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.
Inventory turnover: This is the ratio which analyzes the number of times inventory is sold during the period. This ratio gauges the efficacy of inventory management. Larger the ratio, more efficient the inventory management.
Compute the ratio as follows:
- 1. Calculate the gross profit margin of Company M:
- 2. Calculate the operating profit margin of Company M:
- 3. Calculate the net profit margin of Company M:
- 4. Calculate the total asset turnover ratio of Company M:
Working note (1):
Calculate the value of average total assets.
- 5. Calculate the return on total assets of Company M:
Working note (2):
Calculate the value of interest expense.
- 6. Calculate the return on common equity of Company M:
Working note (3):
Calculate the average shareholder’s equity.
- 7. Calculate the current ratio of Company M:
Working note (4):
Compute the current assets:
Working note (5):
Compute the current liabilities:
- 8. Calculate the inventory turnover of Company M:
Working note (6):
Compute the average inventory:
- 9. Calculate the payable turnover of Company M:
Working note (7):
Compute the average accounts payable:
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Chapter 5 Solutions
Intermediate Accounting: Reporting and Analysis (Looseleaf)
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