Cho has been asked to calculate the profitability ratios of Cute Camel Woodcraft Company and make comments on its second-year performance as compared to its first-year performance. The following shows Cute Camel’s income statement for the last two years. The company had assets of $7,050,000 in the first year and $11,277,600 in the second year. Common equity was equal to $3,750,000 in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new stock in the second year. Cute Camel Woodcraft Company Year Income Statements Years Ending December 31 Year 2 Year 1 Net Sales $3,810,000 $3,000,000 Operating costs less depreciation and amortization 1,610,000 1,495,000 Depreciation and amortization 190,500 120,000 Total Operating Costs $1,800,500 $1,615,000 Operating Income $2,009,500 $1,385,000 Interest 200,950 110,800 Earnings before taxes $1,808,550 $1,274,200 Taxes (40%) 723,420 509,680 Net Income $1,085,130 $764,520 Answer: 1. Given the income statements, calculate the profitability ratios of Cute Camel Woodcraft Company Profitability Ratio Value Year 2 Year 1 Operating profit margin ? 46.17% Net profit margin 28.48% ? Return on total assets ? 10.84% Return on common equity ? 20.39% 2. Which of the following statements are true about profitability ratios? Check all that apply. If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. If a company’s operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. An increase in the return on assets ratio implies an increase in the assets a firm owns. If a company issues new common shares but its net income does not increase, return on common equity will increase.

Managerial Accounting: The Cornerstone of Business Decision-Making

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ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 38E: Sundahl Companys income statements for the past 2 years are as follows: Refer to the information for...

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Cho has been asked to calculate the profitability ratios of Cute Camel Woodcraft Company and make comments on its second-year performance as compared to its first-year performance.

The following shows Cute Camel’s income statement for the last two years. The company had assets of $7,050,000 in the first year and $11,277,600 in the second year. Common equity was equal to $3,750,000 in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new stock in the second year.

Cute Camel Woodcraft Company	Year
Income Statements
Years Ending December 31
	Year 2	Year 1
Net Sales	$3,810,000	$3,000,000
Operating costs less depreciation and amortization	1,610,000	1,495,000
Depreciation and amortization	190,500	120,000
Total Operating Costs	$1,800,500	$1,615,000
Operating Income	$2,009,500	$1,385,000
Interest	200,950	110,800
Earnings before taxes	$1,808,550	$1,274,200
Taxes (40%)	723,420	509,680
Net Income	$1,085,130	$764,520

Answer:

Given the income statements, calculate the profitability ratios of Cute Camel Woodcraft Company

Profitability Ratio	Value
	Year 2	Year 1
Operating profit margin	?	46.17%
Net profit margin	28.48%	?
Return on total assets	?	10.84%
Return on common equity	?	20.39%

2. Which of the following statements are true about profitability ratios? Check all that apply.

If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales.
If a company’s operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.
An increase in the return on assets ratio implies an increase in the assets a firm owns.
If a company issues new common shares but its net income does not increase, return on common equity will increase.

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