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ome ?? ?? ?? ???? ?? ??? ?? ?? eagj%? 14% ?6?6???6:44:48 a Chapter 12 Search Textbook Solutions | C x ? Oezio.mbeducation.com hm.tpx Exercise 12-6 Evaluate profitability ratios (LO12-4) The 2018 income statement of Adrian Express reports sales of $19,710,000, cost of goods sold of $12,350,000, and net income of $1,780,000. Balance sheet information is provided an the following table. ADRIAN EXPRESS Balance Sheet December 31, 2018 and 2017 2018 2017 Assets Current assets: Cash $ 740,000 880,000 Accounts receivable Inventory ,650,000 1,130,000 1,550,000 2,070,000 4,940,000 Long-term assets 4,360,000 Total assets $9,400,000 $7,920,000 Liabilities and Stockholders\' Equity Current liablities Long-term liabilties Common stock Retained earnings $1,964,000 $1,784,000 2.436.000 2,524,000 1,950,000 1930,000 3,050,000 1,682,000 Total liabilities and stockholders equity $9.400,000 $7,920,000 Industry averages for the following proftability ratios are as follows: Gross profit ratio 45%

Solution

Requirement - 1

Profitability Ratios

Gross Profit Ratio

37.3%

Return on Asset

20.6%

Profit Margin

9%

Asset Turnover

2.3 Times

Return on Equity

41.3%

Calculations

Gross Profit Ratio

Gross Profit Ratio = [ Gross Profit / Sales ] x 100

= [ $73,60,000 / 197,00,000 ] x 100

= 37.3%

Return on Asset

Return on Asset = [ Net Income / Average Total Assets ] x 100

= [ $17,80,000 / { (94,00,000 + 79,20,000) / 2 } ] x 100

= 20.6%

Profit Margin

Profit Margin = [ Net Income / Sales ] x 100

= [ $17,80,000 / 1,97,10,000 ] x 100

= 9%

Asset Turnover

Asset Turnover = Sales / Average Total Assets

= $1,97,10,000 / { (94,00,000 + 79,20,000) / 2 }

= $197,10,000 / 86,60,000

= 2.3 Times

Return on Equity

Return on Equity = [ Net Income / Average Stockholders Equity ] x 100

Stockholders Equity 2018 = 19,50,000 + 30,50,000 = 50,00,000

Stockholders Equity 2017 = 19,30,000 + 16,82,000 = 36,12,000

Return on Equity = [ $17,80,000 / { (50,00,000 + 36,12,000) / 2 } ] x 100

= [ $17,80,000 / 4306000 ] x 100

= 41.3%

Requirement - 2

“ LESS PROFITABLE “. The company is considered to be less profitable than the industry average

Profitability Ratios
Gross Profit Ratio	37.3%
Return on Asset	20.6%
Profit Margin	9%
Asset Turnover	2.3 Times
Return on Equity	41.3%