The following income statement and balance sheets for The Athletic Attic are provided. THE ATHLETIC ATTIC Income Statement For the year ended December 31, 2021 Net sales $8,740,000 Cost of goods sold 5,370,000 Gross profit 3,370,000 Expenses: Operating expenses $1,520,000 Depreciation expense 194,000 Interest expense 34,000 Income tax expense 344,000 Total expenses 2,092,000 Net income $1,278,000 THE ATHLETIC ATTIC Balance Sheets December 31 2021 2020 Assets Current assets: Cash $148,000 $198,000 Accounts receivable 710,000 730,000 Inventory 1,325,000 995,000 Supplies 94,000 69,000 Long-term assets: Equipment 1,070,000 1,070,000 Less: Accumulated depreciation (388,000) (194,000) Total assets $2,959,000 $2,868,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $99,000 $75,000 Interest payable 0 3,400 Income tax payable 32,000 29,400 Long-term liabilities: Notes payable 440,000 440,000 Stockholders' equity: Common stock 540,000 540,000 Retained earnings 1,848,000 1,780,200 Total liabilities and stockholders’ equity $2,959,000 $2,868,000 Earnings per share for the year ended December 31, 2021, are $1.20. The closing stock price on December 31, 2021, is $20.82. Required: Calculate the following profitability ratios for 2021. (Round your answers to 1 decimal place.) Profitability Ratios 1. Gross profit ratio % 2. Return on assets % 3. Profit margin % 4. Asset turnover times 5. Return on equity % 6. Price-earnings ratio times
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.
The following income statement and balance sheets for The Athletic Attic are provided.
| THE ATHLETIC ATTIC | ||
| Income Statement | ||
| For the year ended December 31, 2021 | ||
| Net sales | $8,740,000 | |
| Cost of goods sold | 5,370,000 | |
| Gross profit | 3,370,000 | |
| Expenses: | ||
| Operating expenses | $1,520,000 | |
| 194,000 | ||
| Interest expense | 34,000 | |
| Income tax expense | 344,000 | |
| Total expenses | 2,092,000 | |
| Net income | $1,278,000 |
| THE ATHLETIC ATTIC | ||
| Balance Sheets | ||
| December 31 | ||
| 2021 | 2020 | |
| Assets | ||
| Current assets: | ||
| Cash | $148,000 | $198,000 |
| Accounts receivable | 710,000 | 730,000 |
| Inventory | 1,325,000 | 995,000 |
| Supplies | 94,000 | 69,000 |
| Long-term assets: | ||
| Equipment | 1,070,000 | 1,070,000 |
| Less: Accumulated depreciation | (388,000) | (194,000) |
| Total assets | $2,959,000 | $2,868,000 |
| Liabilities and |
||
| Current liabilities: | ||
| Accounts payable | $99,000 | $75,000 |
| Interest payable | 0 | 3,400 |
| Income tax payable | 32,000 | 29,400 |
| Long-term liabilities: | ||
| Notes payable | 440,000 | 440,000 |
| Stockholders' equity: | ||
| Common stock | 540,000 | 540,000 |
| 1,848,000 | 1,780,200 | |
| Total liabilities and stockholders’ equity | $2,959,000 | $2,868,000 |
Earnings per share for the year ended December 31, 2021, are $1.20. The closing stock price on December 31, 2021, is $20.82.
Required:
Calculate the following profitability ratios for 2021. (Round your answers to 1 decimal place.)
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