#10 with explanations 6 Financial statements for Askew Industries for 2018 are s

Question

#10 with explanations 6 Financial statements for Askew Industries for 2018 are shown below (in $000's 8,800 Sales Cost of goods sold Gross profit Operating expenses Interest expense Tax expense 2,650 (1,850) (140) 264 Net incone $ 396 References Comparative Balance Sheets Dec. 31 2018201 540 440 Cash Accounts receivable Inventory Property, plant, and equipment (set 340 540 1.4001-500 3,220 $2,820 540 740 Liabilities and Shareholders' Equity Current liabilities Bonds payable Paid-in capital Retained earnings 740 490 1,100 2,100 540 3,220 $2,820 Required: Calculate the following ratios for 2018. (Consider 365 days a year. Do not round intermediate calculatio answers to 2 decimal places)

Explanation / Answer

Required : Computation of Return on Equity by Dupont (#10 point)

Given information : Net profit margin = 4.5%

                                   Assets turnover ratio = 2.91 times

                                   Equity multiplier = 2.31 times

Solution : ROE = net profit margin × asset turnover × equity multiplier

                         =4.5% * 2.91 * 2.31

                         = 30.25%

Explanation : Return on equity is the measure of the level of income attributable to shareholders of the company against the investment they have put into the firm. it helps in measuring how efficiently a company is able to generate profits using shareholder’s equity funds , which includes stock offerings and retained earnings.

Net profit margin is calculated by dividing net income by sales (net profit ÷ sales) . this margin depicts the net profits that a firm is earning for each dollar of sales it generates after the costs/ expenses of producing and selling goods/services, overhead expenses, interest and taxes, other indirect expenses are duly accounted for.

The asset turnover ratio is the ratio that is calculated by dividing sales by total assets (sales ÷ average total assets). The ratio is depicts how efficiently management is able to drive sales from company assets.

the equity multiplier is the final component of the DuPont formula . The calculation is done by dividing assets by shareholder’s equity (average if data is provided) i.e (assets ÷ equity). This ratio measures the amount of debt a firm uses, or its leverage. The higher the ratio, the more debt the company employs in relation to shareholder’s equity.

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