Madison Company Income Statement For the Year Ended June 30 Sales $2,100,000 Cos

Question

Madison Company Income Statement For the Year Ended June 30 Sales $2,100,000 Cost of goods sold 1,260,000 Gross margin 840,000 Selling and administrative expenses 660,000 Net operating income 180,000 Interest expense 30,000 Net income before taxes 150,000 Income taxes 45 ,000 Net income $ 105,000 Account balances at the beginning of the company 's fiscal year were: accounts receivable, $140,000 ; and inventory, $260,000 . All sales were on account. Assets at the beginning of the year totaled $1 ,100,000, and the stockholders ' equ totaled $725 ,000. Required: Compute the following : 1. Return on total assets. (Round your answer to 1 decimal place. Omit the "%" sign in your response., Return on total assets 2. Return on common stockholders ' equ . (Round your answer to 1 decimal place. Omit the"%" sign in your response., Return on common stockholders' equity 3. Was financial leverage positive or negative for the year? <' Positive I Negative

Explanation / Answer

Return on total assets = Net income before tax/ total net asset = 150000/1100000 = 0.1363 Return on common stockholders ' equ = net income / stockholders ' equ = 105000/725000 = 0.1448 financial leverage is positive if Return on common stockholders ' equ > Return on total assets so here it is positive

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