Question

The current year financial statements for Blue Water Company and Prime Fish Company are presented below. Blue Water Prime Fish Balance sheet: Cash Accounts receivable (net) Inventory Property & equipment (net) Other assets Total assets 21,000 31,000 40,000 401,000 305,000 $ 798,000 49,000 60,000 512,000 106,000 71,000 $ 798,000 $ 41,000 38,000 99,000 140,000 84,000 $ 402,000 99,000 65,000 148,000 29,000 61,000 $ 402,000 $ Current liabilities $ Long-term debt (interest rate: 10%) Capital stock ($10 par value) Additional paid-in capital Retained earnings Total liabilities and stockho lde rs' equity Income statement: $ 447,000 (241,000) (161,000) 45,000 Sales revenue (1/3 on credit) Cost of goods sold Operating expenses Net income 802,000 (400,000) (311,000) $ 91,000 Other data: Per share stock price at end of current year Average income tax rate Dividends decla red and paid in current year $ 22 30% $ 33,000 $ 15 30% $ 148,000 Both companies are in the fish catching and manufacturing business. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Blue Water is more conservative, and as its president has said, "We avoid what we consider to be undue risk." Neither company is publicly held.

Answer 1

Answer to Requirement 1.

Return on Equity = Net Income/ Total Equity * 100

Total Equity = Capital Stock + Additional Paid- in capital + Retained Earnings

Blue Water Company:

Total Equity = $148,000 + $29,000 + $61,000 = $238,000

Return on Equity = $45,000/ $238,000 * 100

Return on Equity = 18.91%

Prime Fish Company:

Total Equity = $512,000 + $106,000 + $71,000 = $689,000

Return on Equity = $91,000/ $689,000 * 100

Return on Equity = 13.21%

Answer to Requirement 2.

Return on Assets = Net Income / Total Assets * 100

Blue Water Company:

Return on Assets = $45,000/ $402,000 * 100

Return on Assets = 11.19%

Prime Fish Company:

Return on Assets = $91,000/ $798,000 * 100

Return on Assets = 11.40%

Answer to Requirement 3.

Gross Profit Percentage = Gross Profit/ Net Sales * 100

Gross Profit = Net Sales - Cost of Goods sold

Blue Water Company:

Gross Profit = $447,000 - $241,000 = $206,000

Gross Profit Percentage = $206,000/ $447,000 * 100

Gross Profit Percentage = 46.09%

Prime Fish Company:

Gross Profit = $802,000 - $400,000 = $402,000

Gross Profit Percentage = $402,000/ $802,000 * 100

Gross Profit Percentage = 50.12%

Answer to Requirement 4.

Net Profit Margin = Net Income/ Net Sales * 100

Blue Water Company:

Net Profit Margin = $45,000/ $447,000 * 100

Net Profit Margin = 10.07%

Prime Fish Company:

Net Profit Margin = $91,000/ $802,000 * 100

Net Profit Margin = 11.35%