Supply Company reported the following information in its comparative financial statements for the fiscal year ended January 31. January 31 January 31
2018 2017
Net sales $91,000 $89,500
Net earnings $6,370 $6,220
Average total assets $65,000 $64,400
Requirement
1. Compute net profit margin ratio (%) for the years ended January 31, and 2017. Did it improve or worsen in 2018?
2. Compute asset turnover for the years ended January 31, 2018 and 2017. Did improve or worsen in 2018? 2018 2017 91,000 $ 89,500 Net sales
3. Compute return on assets for the years ended January 31, 2018 and 2017. Did it improve or worsen in 2018? Which component-net profit margin ratio or asset turnover-was mostly responsible for the change in the company's return on assets?

See explanation

Explanation:

1. Net profit margin ratio (%) for 2017 will be:

= Net income/Net sales

= 6220/89500

= 0.0695

= 6.95%

Net profit margin ratio (%) for 2018 will be:

= Net income/Net sales

= 6370/91000

= 0.07

= 7%

An improvement of (7% - 6.95%) = 0.05% occurs in net profit.

2. Asset turnover for the year ended 2017 will be:

Net sales/Average total assets

= 89500/64400

= 1.39

= 139%

Asset turnover for the year ended 2018 will be:

Net sales/Average total assets

= 91000/65000

= 1.4

= 140%

There's an improvement in the asset turnover in 2018.

3. Return on assets for 2017 will be:

= Net income/Average total asset

= 6220/64400

= 9.66%

Return on assets for 2018 will be:

= Net income/Average total asset

= 6370/65000

= 9.80%

An improvement in return on total assets of (9.80% - 9.66%) = 0.14% occurs.

Both component-net profit margin ratio or asset turnover- are responsible for the change in the company's return on assets.

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