Question

Brad's BBQ reported sales of $780,000 and net income of $32,500. Brad’s also reported ending total assets of $499,000 and beginning total assets of $392,000. Required: Calculate the return on assets, the profit margin, and the asset turnover ratio for Brad's BBQ.

Answer 1

Answer)

Return on Assets: It is the amount of Net Income (Profit) generated as a percentage of value of Assets.

Calculation of Return on Net Assets:

Return on Assets = Net Income/ Average Total Assets

                               = $ 32,500/ $ 445,500

                               = 7.295% or 7.30% (rounded off)

Therefore, the Return on Assets of the company is 7.30%

Return on Profit margin: It is the amount of Net Income (Profit) generated as a percentage of Total Sales for a given period.

Calculation of Profit Margin:     

Profit Margin= Net Income/ Sales

                        = $ 32,500/ $ 780,000

                        = 4.167% or 4.17% (rounded off)

Therefore, the Profit margin of the company is 4.17%

Asset Turnover Ratio: It is a financial ratio which measures the efficiency of the company in generating sales by the use of its assets

Calculation of Asset Turnover Ratio:     

Profit Margin= Net Sales/ Average Total Assets

                        = $ 780,000/ $ 445,500

                        = 1.75 times

Therefore, the Asset turnover ratio the company is 1.75 times

Working Note:

Average Total Assets = (Value of Total Assets in the beginning of the period + Value of Total Assets in the end of the period)/ 2

                                       = ($ 392,000 + $ 499,000)/ 2

                                        = $ 891,000/2

                                      = $ 445,500.

Therefore the value of Average total assets = $ 445,500.