Question

Brooklet Company reports the following balance sheet information for 2018 and 2019. 2018 2019 Assets Current assets Cash Accounts receivable Inventory BROOKLET COMPANY Balance Sheets as of December 31, 2018 and 2019 2018 2019 Liabilities and Owners' Equity Current liabilities $ 45,262 $ 57,602 Accounts payable 61,281 61,281 81,639 81,639 Notes payable 126,088 192,061 $ 190,922 $ 198,611 86,020 137,588 Total $276,942 $ 336,199 Total $ 232,631 $ 331,302 Long-term debt $239,000 $ 175,750 Owners' equity Common stock and paid-in surplus $216,000 $ 216,000 Accumulated retained earnings 158,636 192,931 Fixed assets Net plant and equipment $ 657,947 $589,578 Total $ 374,636 $ 408,931 Total assets $890,578 $920,880 Total liabilities and owners' equity $890,578 $920,880 Suppose that the Brooklet Company had sales of $2,236,873 and net income of $101,381 for the year ending December 31, 2019.

Answer 1

Given,

sales = $2236873

NI = $101381

Profit margin = NI/Sales = 101381/2236873 = 4.53%

Total asset turnover = Sales / total assets = 2236873/920880 = 2.43 times

Equity multiplier = Total assets/ equity = 920880/408931 = 2.25 times

So Return on equity = Profit margin * total asset turnover * Equity multiplier = 4.53 * 2.43 * 2.25 = 24.79%