The financial statements for Castile Products, Inc., are given below: Account ba

Question

The financial statements for Castile Products, Inc., are given below:

     Account balances at the beginning of the year were: accounts receivable, $220,000; and inventory, $330,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $715,000.

Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

The financial statements for Castile Products, Inc., are given below:

Explanation / Answer

(1) – Gross Margin Percentage

Gross Margin = [Gross margin / Sales] x 100

= [$10,00,000 / 22,50,000] x 100

= 44.44%

(2) – Net Profit Margin Percentage

Profit Margin = [Net Income / Sales] x 100

= [$232,820 / 22,50,000] x 100

= 10%

(3) - Return on Total Assets

Return on Total Assets = Net Income + Interest[1 – tax Rate] / Average Total Assets

= {$232,820 + 37,400[1 - 0.40] } / [ ($14,11,000 + 10,70,000)/2] 100

= [$259,000 / 12,40,500] x 100

= 20.9%

(4) - Return on Equity

Return on Equity = [Net Income / Average Stockholder’s Equity] x 100

= [ $232,820 / {($791,000 + 715,000)/2] x 100

= [$232,820 / 753,000] x 100

= 30.9%

(5) – POSITIVE. Financial leverage Positive since the Return on Equity[30.9%] is greater than the Return on Total Assets[20.9%]

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