The financial statements for Castile Products, Inc., are given below: Castile Products, Inc.Balance SheetDecember 31 Assets Current assets: Cash $ 19,000 Accounts receivable, net 220,000 Merchandise inventory 370,000 Prepaid expenses 8,000 Total current assets 617,000 Property and equipment, net 810,000 Total assets $ 1,427,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 230,000 Bonds payable, 11% 310,000 Total liabilities 540,000 Stockholders’ equity: Common stock, $5 par value $ 170,000 Retained earnings 717,000 Total stockholders’ equity 887,000 Total liabilities and stockholders' equity $ 1,427,000 Castile Products, Inc.Income StatementFor the Year Ended December 31 Sales $ 2,220,000 Cost of goods sold 1,180,000 Gross margin 1,040,000 Selling and administrative expenses 640,000 Net operating income 400,000 Interest expense 34,100 Net income before taxes 365,900 Income taxes (30%) 109,770 Net income $ 256,130 Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $340,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $655,000. Required: Compute the following: 1. Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 2. Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).) 3. Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) 4. Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) 5. Was financial leverage positive or negative for the year? Positive Negative
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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The financial statements for Castile Products, Inc., are given below: |
| Castile Products, Inc. Balance Sheet December 31 |
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| Assets | ||||||
| Current assets: | ||||||
| Cash | $ | 19,000 | ||||
| Accounts receivable, net | 220,000 | |||||
| Merchandise inventory | 370,000 | |||||
| Prepaid expenses | 8,000 | |||||
| Total current assets | 617,000 | |||||
| Property and equipment, net | 810,000 | |||||
| Total assets | $ | 1,427,000 | ||||
| Liabilities and |
||||||
| Liabilities: | ||||||
| Current liabilities | $ | 230,000 | ||||
| Bonds payable, 11% | 310,000 | |||||
| Total liabilities | 540,000 | |||||
| Stockholders’ equity: | ||||||
| Common stock, $5 par value | $ | 170,000 | ||||
| |
717,000 | |||||
| Total stockholders’ equity | 887,000 | |||||
| Total liabilities and stockholders' equity | $ | 1,427,000 | ||||
| Castile Products, Inc. Income Statement For the Year Ended December 31 |
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| Sales | $ | 2,220,000 | |
| Cost of goods sold | 1,180,000 | ||
| Gross margin | 1,040,000 | ||
| Selling and administrative expenses | 640,000 | ||
| Net operating income | 400,000 | ||
| Interest expense | 34,100 | ||
| Net income before taxes | 365,900 | ||
| Income taxes (30%) | 109,770 | ||
| Net income | $ | 256,130 | |
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Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $340,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $655,000. |
| Required: |
| Compute the following: |
| 1. |
Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
| 2. |
Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).) |
| 3. |
Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) |
| 4. |
Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) |
| 5. | Was financial leverage positive or negative for the year? | ||||
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