Question

Selected information follow for Bush Company:

	2019	2018
Sales revenue	$700,000	$520,000
Cost of goods sold	407,700	310,000
Interest expense	22,000	14,000
Income tax expense	6,500	5,100
Net income	30,000	20,300
Cash flow from operating activities	29,500	26,500
Capital expenditures	42,000	25,000
Accounts receivable (net), December 31	182,000	128,000
Inventory, December 31	225,000	180,000
Stockholders’ equity, December 31	205,000	165,000
Total assets, December 31	460,000	350,000

Required
Calculate the following ratios for 2019. The 2018 results are given for comparative purposes.

Round answers to one decimal place. Use 365 days in a year.

	2018		2019
1. Gross profit percentage	40.4%		Answer	%
2. Return on assets	6.5%		Answer	%
3. Return on sales	3.9%		Answer	%
4. Return on common stockholders’ equity
(no preferred stock was outstanding)	14.2%		Answer	%
5. Accounts receivable turnover	4.8		Answer
6. Average collection period	76.5	days	Answer	days
7. Inventory turnover	2.1		Answer
8. Times-interest-earned ratio	2.8		Answer
9. Operating-cash-flow-to-capital-expenditures ratio	1.1		Answer

Answer 1

First 4 ratios are being calculated here:

1. Gross Profit percentage ratio = Gross Profit / Sales * 100

For 2019:

Sales (given) = $700000

Gross Profit = Sales - Cost of goods sold

Gross Profit = $700000 - $407700 = $292300

Putting the values in the above gross profit percentage formula, we get,

Gross Profit ratio = $292300 / $700000 * 100 = 41.8%

2. Return on assets (ROA) = Net income / Average total assets * 100

where, Average total assets = Beginning assets + Ending assets / 2

So, Average assets = ($350000 + $460000) / 2 = $810000 / 2 = $405000

Net income = $30000

Now, putting these values in the above ROA formula, we get,

Return on assets (ROA) = $30000 / $405000 * 100 = 7.4%

3. Return on sales  = Net income / Sales * 100

Net income = $30000, Sales = $700000

Now, putting these values in the above formula, we get,

Return on sales = $30000 / $700000 * 100 = 4.3%

4. Return on common stockholder's equity (ROE) = Net income / Average stockholder's equity * 100

where, Average stockholder's  equity = Beginning stockholder's equity + Ending stockholder's equity / 2

For 2019:

So, Average stockholder's equity = ($165000 + $205000) / 2 = $370000 / 2 = $185000

Net income = $30000

Now, putting these values in the above ROE formula, we get,

Return on equity (ROE) = $30000 / $185000 * 100 = 16.2%