Looking back over the last few years it is clear that Nicole Mackisey has accomp
ID: 2470011 • Letter: L
Question
Looking back over the last few years it is clear that Nicole Mackisey has accomplished a lot running her business Nicole's Getaway Spa (NGS) Nicole is curious about her company's performance as she compares its financial statements Balance Sheet 14 Accounts Receivable , net Inventory Prepaid Expenses Other Current Assets $ 10,500 $ 8,000 $ 7,600 4,400 2, 150 1,510 1,810 Total Current Assets Property and Equipment, net 18 550 83,000 18,700 98,000 15,200 46,000 Total Assets $101,550 $116,700 SS1,200 Current Liabilities Long-Term Liabilities $ 15,600 41.650 $ 15,600 56.650 S16,600 20,650 Total Liabilities 57 25072 250 37.250 Common Stock Retained Earnings 34. 500 39,500 20,400 Total Stockholders' Equity 44,300 44, 450 23,950 Total Liabilities and Stockholders' Equity $101550 S116,700 551200 Income Statement Sales Revenue Cost of Goods Sold $ 89,500S S 65,500 $53,500 40,700 Gross Profit Operating Expenses 18.00 12,800 4,950 Income from operations Interest Expense 13.850 1,570 8850 3.670 4,850 Income before Income Tax Expense Income Tax Expense 12 280 5, 180 4000 $ 8,280 $ 3,430 $ 2030Explanation / Answer
1 a.
Gross profit Percentage ratio is calculated using the formula,
Gross Profit/Net Sales * 100
For 2015,
Gross profit is $11,800
Net Sales is $65,500
So Gross profit percentage = $11,800/$65,500 * 100 = 18.02% (Rounded off to 2 decimals)
For 2016,
Gross profit is $18,800
Net Sales is $89,500
So Gross profit percentage = $18,800/$89,500 * 100 = 21.01% (Rounded off to 2 decimals)
Return on equity is calculated using the formula,
(Net Profit after tax – Preference Dividend)/Equity Share Capital * 100
For 2015,
Net Profit after tax is $3,430
There is no preference stock, so the preference dividend will be $0
Equity Share Capital or Common Stock is $39,500
So Return on Equity = ($3,430 - $0)/$39,500 *100 = 8.68% (Rounded off to 2 decimals)
For 2016,
Net Profit after tax is $8,280
There is no preference stock, so the preference dividend will be $0
Equity Share Capital or Common Stock is $34,500
So Return on Equity = ($8,280 - $0)/$34,500 *100 = 24.00%
Fixed Asset Turnover Ratio is calculated using the formula,
Net Sales/Fixed Assets
For 2015,
Net Sales is $65,500
Fixed Assets is $98,000
So Fixed asset turnover ratio = $65,500/$98,000 = 0.67 (Rounded off to 2 decimals)
For 2016,
Net Sales is $89,500
Fixed Assets is $83,000
So Fixed asset turnover ratio = $89,500/$83,000 = 1.08 (Rounded off to 2 decimals)
To Summarize,
2016
2015
Gross Profit Percentage
21.01%
18.02%
Return on Equity
24.00%
8.68%
Fixed Asset Turnover Ratio
1.08
0.67
1b. Profitability can be measured by various ratios. But to put it simple, let us compare Net profit percentage for 2016 and 2015.
Net Profit Percentage = Net Profit after tax/Net Sales * 100
For 2015,
Net Profit after tax is $3,430
Net Sales is $65,500
Net Profit Percentage = $3,430/$65,500 * 100 = 5.24% (Rounded off to 2 decimals)
For 2016,
Net Profit after tax is $8,280
Net Sales is $89,500
Net Profit Percentage = $8,280/$89,500 * 100 = 9.25% (Rounded off to 2 decimals)
Net Profit percentage of 2016 is higher than 2015. So NGS was more profitable in 2016.
2. Current Ratio is calculated using the formula,
Current Assets/Current Liabilities
For 2015,
Current Assets is $18,700
Current Liabilities is $15,600
Current Ratio = $18,700/$15,600 = 1.20 (Rounded off to 2 decimals)
For 2016,
Current Assets is $18,550
Current Liabilities is $15,600
Current Ratio = $18,550/$15,600 = 1.19 (Rounded off to 2 decimals)
To Summarize,
2016
2015
Current Ratio
1.19
1.20
3a.
Debt-to-assets ratio is calculated using the formula,
Total Liabilities / Total Assets
For 2015,
Total Liabilities is $72,250
Total Assets is $116,700
Debt-to-assets ratio = $72,250/$116,700 = 0.62 (Rounded off to 2 decimals)
For 2016,
Total Liabilities is $57,250
Total Assets is $101,550
Debt-to-assets ratio = $57,250/$101,550 = 0.56 (Rounded off to 2 decimals)
Times Interest earned ratio is calculated using the formula,
Net Profit before Interest and Taxes/Interest Expense
For 2015,
Net Profit Before Interest and Taxes is $8,850
Interest Expense is $ 3,670
Times Interest earned ratio = $8,850/$3,670 = 2.41 (Rounded off to 2 decimals)
For 2016,
Net Profit Before Interest and Taxes is $13,850
Interest Expense is $ 1,570
Times Interest earned ratio = $13,850/$1,570 = 8.82 (Rounded off to 2 decimals)
To Summarize,
2016
2015
Debt-to-assets Ratio
0.56
0.62
Times Interest Earned Ratio
8.82
2.41
3b. There are various ratios to test the solvency of an organization. But from the Times Interest Earned ratio calculated above, NGS was more solvent in 2016.
2016
2015
Gross Profit Percentage
21.01%
18.02%
Return on Equity
24.00%
8.68%
Fixed Asset Turnover Ratio
1.08
0.67
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