Baker Oats had an asset turnover of 1.6 times per year.
a. If the return on total assets (investment) was 11.2 percent, what was Baker’s profit margin?
The profit margin of the company is 7%.
The profit margin of the company is calculated as a percentage of income divided by revenue. Net profit margins are most used by creditors, investors, and the businesses themselves to evaluate the financial health of the company.
Although there are many types of profit margins, the most important and commonly used is the net profit margin - calculated after deducting all the company's expenses, including taxes and interests.
Another way to compute the net profit margin is to use the DuPont model, in which: ROA (Return on assets) = Net profit margin x Asset Turnover.
The Haines Corp. shows the following financial data for 20X1 and 20X2:
Cost of goods sold
Selling and administrative expenses
Income before taxes
Income after tax
For each year, compute the following and indicate whether it is increasing or
decreasing profitability in 20X2 as indicated by the ratio:
a. Cost of goods sold to sales.
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
Plant and equipment (gross)
Less: accumulated depreciation
Net plant and equipment
Paid in capital
Total liabilities and stockholder’s equity
Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.
$2,500 in preferred stock dividends were paid, and $5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were
unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $40,000. Accounts payable increased by 20 percent. Notes payable increased by $6,500 and bonds payable decreased by $12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.
a. Prepare an income statement for 20X2.
Identify whether each of the following items increases or decreases cash flow:
Increase in accounts receivable
Decrease in prepaid expenses
Increase in notes payable
Increase in inventory
Increase in investment
Increase in accrued expenses
Decrease in account payable
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