Question

Sandhill Medical Comparative Income Statement and Statement of Retained Earnings For the Year 2016 2015 Sales revenue (all on account) $10,510,000 $9,613,950 Cost of goods sold 4.898.000 5,298,750 Gross profit 5,612,000 4,315,200 Operating expenses 2,840,200 2,634,100 Net operating income 2,771,800 305,000 1,681,100 308,650 Interest expense Net income before taxes 2,466,800 1,372,450 Income taxes (30%) 740,040 411,735 Net income $1,726,760 $960,715 Dividends paid Preferred dividends 29,550 29,550 Common dividends 414,000 425,000 Total dividends paid 443,550 454,550 Net income retained 1,283,210 506,165 Retained earnings, beginning of year 3,606,165 3,100,000 Retained earnings, end of year $4,889,375 $3,606,165 Calculate the following profitability ratios for 2016. (Round answers to 1 decimal place, e.g. 50.1%.) a. Gross margin percentage 53.4 b. Return on assets 3.8 c. Return on common stockholders' equity 10.8

Answer 1

Solution:          

a.Calculation of Gross Margin Percentage for 2016 :

The formula for calculating the Gross Margin Percentage is

= [ Total Sales Revenue – Cost of Goods sold ] / Total Sales Revenue

As per the information given in the question we have

Total Sales Revenue = $ 10,510,000 ; Cost of Goods sold = $ 4,898,000

Applying the above information in the formula we have

= ( $ 10,510,000 - $ 4,898,000 ) / $ 10,510,000

= $ 5,612,000 / $ 10,510,000

= 0.533968

= 53.3968 %

= 53.4 % ( when rounded off to one decimal place )

Thus the Gross Margin Percentage for 2016 = 53.4 %

b.Calculation of Return on Assets for 2016:

The formula for calculating the Return on Assets is

Return on assets = Net Income / Average Total Assets

As per the information given in the question we have

Net Income for 2016 = $ 1,726,760   ;

Total Assets for the year 2016 = $ 11,945,125

Total Assets for the year 2015 = $ 10,503,665

Thus Average Total Assets = [ Total Assets for the year 2016 + Total Assets for the year 2015 ] / 2

= [ $ 11,945,125 + 10,503,665 ] / 2

= $ 22,448,790 / 2

= $ 11,224,395

Thus Average Total Assets = $ 11,224,395

Applying the above information in the formula for Return on Assets we have

= $ 1,726,760 / $ 11,224,395

= 0.153840

= 15.3840 %

= 15.4 % ( when rounded off to one decimal place )

Thus the Return on Assets is = 15.4 %

c.Calculation of Return on common stockholders’ equity for 2016:

The formula for calculating the Return on common stockholders’ equity is

= Net Income / Stock holders’ equity

As per the information given in the question we have

Net Income for 2016 = $ 1,726,760   ;

Total stockholders’ equity for the year 2016 = $ 5,078,745

Applying the above information in the formula we have

= $ 1,726,760 / $ 5,078,745

= 0.3400

= 34.0 % ( when rounded off to one decimal place )

Thus the Return on stockholders’ equity for 2016 = 34.0 %