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Exercise 15-5 (10 minutes)
1. Calculation of the gross margin percentage:
Gross margin
Gross margin percentage = Sales
$27,000
= = 34.2%
$79,000
2. Calculation of the net profit margin percentage:
Net income
Net profit margin percentage = Sales
$3,540
= = 4.5% (rounded)
$79,000
3. Calculation of the return on total assets:
Net income +
[Interest expense × (1 - Tax rate)]
Return on total assets = Average total assets
$3,540 + [$600 × (1 - 0.40)]
= = 8.1%
($50,280 + $45,960)/2
4. Calculation of the return on equity:
Net income
Return on equity =
Average total stockholders' equity
$3,540
= = 10.64%
($34,880 + $31,660)/2
Exercise 15-7 (15 minutes)
1. The trend percentages are:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales ................................
100.0
110.0
115.0
120.0
125.0
Current assets:
Cash ..............................
100.0
130.0
96.0
80.0
60.0
Accounts receivable ........
100.0
115.0
135.0
170.0
190.0
Inventory .......................
100.0
110.0
115.0
120.0
125.0
Total current assets ...........
100.0
112.6
120.3
133.7
142.1
Current liabilities ...............
100.0
110.0
130.0
145.0
160.0
2.
Sales:
The sales are increasing at a steady and consistent rate.
Assets:
The most noticeable thing about the assets is that the
accounts receivable have been increasing at a rapid
rate—far outstripping the increase in sales. This
disproportionate increase in receivables is probably the
chief cause of the decrease in cash over the five-year
period. The inventory seems to be growing at a well-
balanced rate in comparison with sales.
Liabilities:
The current liabilities are growing more rapidly than the
total current assets. The reason is probably traceable to
the rapid buildup in receivables in that the company
doesn’t have the cash needed to pay bills as they come
due.
Exercise 15-8 (continued)
6. Average collection period:
Sales on account
Accounts receivable turnover = Average accounts receivable
$420,000
= = 14
($25,000 + $35,000)/2
365 days
Average collection period = Accounts receivable turnover
365 days
= = 26.1 days (
14 rounded)
7. Average sale period:
Cost of goods sold
Inventory turnover = Average inventory
$292,500
($60,000 + $70,000)/2
365 days
Average sale period = = 81.1 days (rounded)
4.5
= 81.1 days + 26.1 days = 107.2 days
Exercise 15-9 (continued)
5. Financial leverage was positive because the return on equity (12.7%)
was greater than the return on total assets (9.2%). This positive
Exercise 15-11 (15 minutes)
1. Return on total assets:
Net income + [Interest expense × (1 - Tax rate)]
Return on =
total assets Average total assets
$280,000 + [$60,000 × (1 - 0.30)]
