Question

The balance sheets for Plasma Screens Corporation and additional information are provided below.

PLASMA SCREENS CORPORATION Balance Sheets December 31, 2021

2021 2020
Assets
Current assets:
Cash $242,000 $130,000
Accounts receivable 98,000 102,000
Inventory 105,000 90,000
Investments 5,000 3,000
Long-term assets:
Land 580,000 580,000
Equipment 890,000 770,000
Less: Accumulated depreciation (528,000 ) (368,000 )
Total assets $1,392,000 $1,307,000

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $109,000 $95,000
Interest payable 7,000 13,000
Income tax payable 9,000 6,000
Long-term liabilities:
Notes payable 110,000 220,000
Stockholders' equity:Common stock 800,000 800,000
Retained earnings 357,000 173,000
Total liabilities and stockholders' equity $1,392,000 $1,307,000

Additional information for 2021:
Net income is $184,000.
Sales on account are $1,890,000.
Cost of goods sold is $1,394,250.

Required:
Calculate the following profitability ratios for 2021.

Profitability Ratio

a. Gross profit ratio
b. Return on assets 13.6%
c. Profit margin 9.7%
d. Asset turnover 1.4
e. Return on equity

Answer 1

Answer:

a. Gross Profit Ratio = Gross Profit / Sales * 100

Where Gross Profit = Sales on account-Cost of goods sold

=1890000 - 1394250

= $495750

Therefore Gross Profit Ratio = 495750 / 1890000 * 100

=26.23%

b. Return on Assets = Net Income/ Average Total Assets

=184,000/1,349,500

=0.1363

=13.65%

c. Profit Margin= Net Income/Sales * 100

=186,000/1,890,000 * 100

=9.74%

d. Asset Turnover+ Net sales / Average Total sales

=1,890,000/1,349,500

=1.4 times

e. Return on Equity = Net income/Stockholders equity

=184,000/(800,000+357,000) * 100

=184,000 / 1,157,000 * 100

=15.9%