Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.MICATIN INC.Comparative Income StatementYears Ended December 31, 2019, and 2018Dollars in thousands201920182017Net Sales Revenue$ 181,000$ 160,000 Cost of Goods Sold93,50086,500 Selling and Administrative Expenses45,00040,500 Interest Expense8,00012,000 Income Tax Expense11,00010,500 Net Income$ 23,500$ 10,500 Additional data: &nbsp...

S. no.Ratio201920181Profit margin ratio13.0%6.6%2Return on total assets15.9%12.7%3Asset turnover ratio0.91 times0.90 times4Return on common stockholders’ equity22.9%9.9%5Earnings per share$1.43/share$0.68/share6The dividend payout on common stock for 2019 is 19.00%7Yes, the company&rsq...

Q20E - Horngren'S Financial And Managerial Accounting

Q20E

Question

Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.

MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018
Dollars in thousands	2019	2018	2017
Net Sales Revenue	\( 181,000	\) 160,000
Cost of Goods Sold	93,500	86,500
Selling and Administrative Expenses	45,000	40,500
Interest Expense	8,000	12,000
Income Tax Expense	11,000	10,500
Net Income	\( 23,500	\) 10,500

Additional data:
Total Assets	\( 209,000	\) 187,000	\( 167,000
Common Stockholders’ Equity	96,000	91,500	80,500
Preferred Dividends	2,000	2,000	0
Common Shares Outstanding During the Year	15,000	15,000	10,000

Requirements

Calculate the profit margin ratio for 2019 and 2018.
Calculate the rate of return on total assets for 2019 and 2018.
Calculate the asset turnover ratio for 2019 and 2018.
Calculate the rate of return on common stockholders’ equity for 2019 and 2018.
Calculate the earnings per share for 2019 and 2018.
Calculate the 2019 dividend payout on common stock. Assume dividends per share for common stock are equal to \)1.13 per share.
Did the company’s operating performance improve or deteriorate during 2019?

Step-by-Step Solution

Verified

Answer

S. no.	Ratio	2019	2018
1	Profit margin ratio	13.0%	6.6%
2	Return on total assets	15.9%	12.7%
3	Asset turnover ratio	0.91 times	0.90 times
4	Return on common stockholders’ equity	22.9%	9.9%
5	Earnings per share	$1.43/share	$0.68/share
6	The dividend payout on common stock for 2019 is 19.00%
7	Yes, the company’s operating performance improve

1Step 1: Meaning of Profit margin ratio

The profit margin ratio shows the rate of income that remains after all business expenses have been paid. Formula to calculate the profit margin ratio is as follows:

$Profit margin ratio = \frac{Net income}{Net sales}$

2Step 2: (1) Calculate the profit margin ratio for 2019 and 2018

2019

$\begin{matrix} Profit margin ratio = \frac{Net income}{Net sales} \\ = \frac{$ 23, 500}{$ 181, 000} \\ = 0.130 or 13.0 % \end{matrix}$

2018

$\begin{matrix} Profit margin ratio = \frac{Net income}{Net sales} \\ = \frac{$ 10, 500}{$ 160, 000} \\ = 0.066 or 6.6 % \end{matrix}$

3Step 3: (2) Calculate the rate of return on total assets for 2019 and 2018.

2019

$\begin{matrix} Rate of return on total asset = \frac{Net income + Interest expense}{Average total assets} \\ = \frac{$ 23, 500 + $ 8, 000}{(\frac{$ 209, 000 + $ 187, 000}{2})} \\ = 0 .159 or 15 .9 % \end{matrix}$

2018

$\begin{matrix} Rate of return on total asset = \frac{Net income + Interest expense}{Average total assets} \\ = \frac{$ 10, 500 + $ 12, 000}{(\frac{$ 187, 000 + $ 167, 000}{2})} \\ = 0 .127 or 12 .7 % \end{matrix}$

4Step 4: (3) Calculate the asset turnover ratio for 2019 and 2018.

2019

$\begin{matrix} Asset turnover ratio = \frac{Net sales revenue}{Average total asset} \\ = \frac{$ 181, 000}{(\frac{$ 209, 000 + $ 187, 000}{2})} \\ = 0 .91 times \end{matrix}$

2018

$\begin{matrix} Asset turnover ratio = \frac{Net sales revenue}{Average total asset} \\ = \frac{$ 160, 000}{(\frac{$ 187, 000 + $ 167, 000}{2})} \\ = 0 .90 times \end{matrix}$

5Step 5: (4) Calculate the rate of return on common stockholders’ equity

2019

$\begin{matrix} Rate of return on common stockholder equity = \frac{Net income - Preferred dividend}{Average common stockholder's equity} \\ = \frac{$ 23, 500 - $ 2, 000}{(\frac{$ 96, 000 + $ 91, 500}{2})} \\ = 0 .229 or 22 .9 % \end{matrix}$

2018

$\begin{matrix} Rate of return on common stockholder equity = \frac{Net income - Preferred dividend}{Average common stockholder's equity} \\ = \frac{$ 10, 500 - $ 2, 000}{(\frac{$ 91, 500 + $ 80, 500}{2})} \\ = 0 .090 or 9 .9 % \end{matrix}$

6Step 6: (5) Calculate the earnings per share for 2019 and 2018

2019

$\begin{matrix} Earning per share = \frac{Net income - Preferred dividend}{Weighted average number of common} \\ = \frac{$ 23, 500 - $ 2, 000}{15, 000 shares} \\ = $ 1 .43 / share \end{matrix}$

2018

$\begin{matrix} Earning per share = \frac{Net income - Preferred dividend}{Weighted average number of common} \\ = \frac{$ 10, 500 - $ 2, 000}{(\frac{15, 000 shares + 10, 000 sahres}{2})} \\ = $ 0 .68 / share \end{matrix}$

7Step 7: (6) Calculate the 2019 dividend pay-out on common stock

$\begin{matrix} Dividend payout = \frac{Annual dividend per share}{Earning per share} \\ = \frac{$ 1 .13 per share}{$ 1 .43 per share} \\ = 0 .790 or 79 .0 % \end{matrix}$

8Step 8: (7) Analysing the company’s performance

The company’s performance improved during 2019 based on an improvement in all ratios evaluated.

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