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Chapter 15: Q20E (page 842)

Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.


MICATIN INC.

Comparative Income Statement

Years Ended December 31, 2019, and 2018

Dollars in thousands

2019

2018

2017

Net Sales Revenue

\( 181,000

\) 160,000

Cost of Goods Sold

93,500

86,500

Selling and Administrative Expenses

45,000

40,500

Interest Expense

8,000

12,000

Income Tax Expense

11,000

10,500

Net Income

\( 23,500

\) 10,500

Additional data:

Total Assets

\( 209,000

\) 187,000

\( 167,000

Common Stockholders’ Equity

96,000

91,500

80,500

Preferred Dividends

2,000

2,000

0

Common Shares Outstanding During the Year

15,000

15,000

10,000

Requirements

  1. Calculate the profit margin ratio for 2019 and 2018.
  2. Calculate the rate of return on total assets for 2019 and 2018.
  3. Calculate the asset turnover ratio for 2019 and 2018.
  4. Calculate the rate of return on common stockholders’ equity for 2019 and 2018.
  5. Calculate the earnings per share for 2019 and 2018.
  6. Calculate the 2019 dividend payout on common stock. Assume dividends per share for common stock are equal to \)1.13 per share.
  7. Did the company’s operating performance improve or deteriorate during 2019?

Short Answer

Expert verified

S. no.

Ratio

2019

2018

1

Profit margin ratio

13.0%

6.6%

2

Return on total assets

15.9%

12.7%

3

Asset turnover ratio

0.91times

0.90 times

4

Return on common stockholders’ equity

22.9%

9.9%

5

Earnings per share

$1.43/share

$0.68/share

6The dividend payout on common stock for 2019 is 19.00%
7Yes, the company’s operating performance improve

Step by step solution

01

Meaning of Profit margin ratio

The profit margin ratio shows the rate of income that remains after all business expenses have been paid. Formula to calculate the profit margin ratio is as follows:

Profit margin ratio =Net incomeNet sales

02

(1) Calculate the profit margin ratio for 2019 and 2018

2019

Profit margin ratio =Net incomeNet sales=$23,500$181,000=0.130 or 13.0%

2018

Profit margin ratio =Net incomeNet sales=$10,500$160,000=0.066 or 6.6%

03

(2) Calculate the rate of return on total assets for 2019 and 2018.

2019

Rate of return on total asset=Net income+Interest expenseAverage total assets=$23,500+$8,000$209,000+$187,0002=0.159 or 15.9%

2018

Rate of return on total asset=Net income+Interest expenseAverage total assets=$10,500+$12,000$187,000+$167,0002=0.127 or 12.7%

04

(3) Calculate the asset turnover ratio for 2019 and 2018.

2019

Asset turnover ratio=Net sales revenueAverage total asset=$181,000$209,000+$187,0002=0.91 times

2018

Asset turnover ratio=Net sales revenueAverage total asset=$160,000$187,000+$167,0002=0.90 times

05

(4) Calculate the rate of return on common stockholders’ equity

2019

Rate of return on common stockholder equity=Net income−Preferred dividendAverage common stockholder's equity=$23,500−$2,000$96,000+$91,5002=0.229 or 22.9%

2018

Rate of return on common stockholder equity=Net income−Preferred dividendAverage common stockholder's equity=$10,500−$2,000$91,500+$80,5002=0.090 or 9.9%

06

(5) Calculate the earnings per share for 2019 and 2018

2019

Earning per share=Net income−Preferred dividendWeighted average number of common=$23,500−$2,00015,000 shares=$1.43/share

2018

Earning per share=Net income−Preferred dividendWeighted average number of common=$10,500−$2,00015,000 shares+10,000 sahres2=$0.68/share

07

(6) Calculate the 2019 dividend pay-out on common stock

Dividend payout=Annual dividend per shareEarning per share=$1.13 per share$1.43 per share=0.790 or 79.0%

08

(7) Analysing the company’s performance

The company’s performance improved during 2019 based on an improvement in all ratios evaluated.

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Most popular questions from this chapter

Net sales revenue, net income, and common stockholders’ equity for Eyesight Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.

2019

2018

2017

2016

Net Sales Revenue

\(766000

\)708000

\(644000

\)664000

Net Income

60000

38000

36000

44000

Ending Common Stockholder’s Equity

368000

352000

326000

296000

Requirements

1.Compute trend analyses for each item for 2017–2019. Use 2016 as the base year, and round to the nearest whole percent.

2.Compute the rate of return on common stockholders’ equity for 2017–2019, rounding to three decimal places.

Measuring ability to pay liabilities

Requirements

1. Compute the debt ratio and the debt-to-equity ratio at May 31, 2018, for Accel’s

Companies.

2. Is Accel’s ability to pay its liabilities strong or weak? Explain your reasoning.

Describe a common-size statement and how it might be helpful in evaluating a company.

The financial statements of Ion Corporation include the following items:

Current Year Preceding Year

Balance Sheet:

Cash \( 6,000 \) 8,000

Short-term Investments 4,400 10,700

Net Accounts Receivable 21,600 29,200

Merchandise Inventory 30,800 27,600

Prepaid Expenses 6,000 3,600

Total Current Assets 68,800 79,100

Total Current Liabilities 53,200 37,200

Income Statement:

Net Sales Revenue $ 184,800

Cost of Goods Sold 126,000

Compute the following ratios for the current year:

7. Current ratio

8. Acid-test ratio

9. Inventory turnover

10. Gross profit percentage

The financial statements of Valerie’s Natural Foods include the following items:

Compute the following ratios for the current year:

  1. Current ratio

  2. Cash ratio

  3. Acid-test ratio

  4. Inventory turnover

  5. Day’s sales in inventory

  6. Day’s sales in receivables

  7. Gross profit percentage
See all solutions

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