Accounting 102 OL
Written Assignment 2
Complete the following end-of-chapter exercises and problem, and submit your answers to your mentor.
Chapter 14:
- Exercise 14.1, page 662
- Exercise 14.2, page 662
- Problem 14.6A, page 670
Chapter 14:
● (Learning Objective 1)Exercise 14.1, page 662 (Percentage Changes)
Selected information taken from the financial statements of Maxum Company for two successive years follows. You are to compute the percentage change from 2010 to 2011 whenever possible. Round all calculations to the nearest whole percentage.
2011
2010
a.
Accounts receivable
$
126,000
160,000
b.
Marketable securities
0
250,000
c.
Retained earnings
80,000
-80,000
d.
Notes receivable
120,000
0
e.
Notes Payable
870,000
800,000
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15% Debt ratio – This is not a measure of short term debt paying ability.
d. Compute the following ratios (assume that the year-end amounts of total assets and total stockholders’ equity also represent the average amounts throughout the year): 1- Return on assets Solution= 11%
Operating Income:
Net Sales $1,500,000
Cost of Goods Sold 1,080,000
Operating Expenses 315,000
Operating Income $ 105,000
Total Assets (From balance sheet) $1,000,000
2- Return on equity Solution =5%
Net Income (from income statement) $ $ 15,000
Stockholders’ Equity (from balance sheet) 300,000
e. Comment on the company’s performance under these measurements. Explain why the return on assets and return on equity are so different.
Solution: 11% return on assets – On page 638 of our text, we are told that at the time of the writing, a “successful” business might be expected to return 15% or more on assets. Downing, Inc.’s 11% is well below.
Solution: 5% return on equity- This number is well below the 12% that might be expected from a large financially strong company. The financial statements for Downing are not dated, so we cannot compare the return on equity to the inflation rate.
Solution difference between return on assets and return on equity: Solution: The differences between these two measures are in their calculation formulas.
Return on assets is
2. If a company had sales of $2,587,643 in 1998 and sales of $3,213,456 in 2003, by what percentage did sales change during this time period? 24.18%
The Corporation's performance metrics highlights three significances for raising shareholder value: returns, leverage, and growth. The Corporation's main concern of growth concentrate on sales through similar companies or club sales and unit square feet growth; the importance of leverage incorporates the Corporation's objective to raise its operating income quicker than the growth rate in net sales by increasing its administrative expenses, selling, and operating expenses, at a measured rate than the progression of its net sales; and the importance of returns emphasizes on how proficient the Corporation engage its assets through return on investment also, how efficiently the Corporation achieves working capital and capital expenditures through free cash flow. (See Figure
15. How has the company’s stock been performing in the last 5 years? Steadily rising since 1/2009. Declining from 2007 – 2009 as expected due to the recession and the change in demand for construction.
How did the corporation perform the past year overall in terms of return on investment, market share, and profitability?
Financial performance measures, such as operating income and return on investment, indicate whether the company’s strategy
a) Explain the difference between the equity section of a not-for-profit business and an investor-owned business.
My name is Andrew Rodgers and I work for PwC. I was contacting you regarding a confirmation and reconciliation for bank account #FR7610188068014801005700178 at Banque Chalus. We received an excel spreadsheet with the information of the bank but have yet to receive anything else.Our team is going to need both a confirmation and a reconciliation to perform necessary audit procedures. If you could please get back to me with the status of these documents it would be greatly appreciated.
Return on equity measures a company’s profitability by calculating how much profit a company generates with the money shareholders have invested. It is important to consider ROE and not just net income in dollar term because it helps for making comparisons among different investment amounts.
* In 2005, the profit was approximately ($144,000 / $5,500,000) 2.6% of sales; does this number indicate whether the company is doing well or not?
2. What do the results say about how firms in this industry can deliver strong financial returns in different ways?
An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.
In addition to both short and long term solvency, a company’s return on invested capital should be analyzed when determining its financial health. Ford’s
Financial performance Revenue, DKK million Profit before special items, DKK million Tax on profit for the year, DKK million Net profit for the year, DKK million Operating margin (ROS) Return on equity (ROE) Return on invested capital (ROIC) 11,661 3,002 -683 2,204 24.9% 82.3% 139.5% 9,526 2,004 -500 1,352 22.0% 72.2% 101.8% 8,027 1,471 -386 1,028 18.1% 71.6% 69.7% 7,798 1,405 9 1,290 17.0% 147.1% 63.6%
The results of the company’s return on assets ratio measuring profitability overall was 7.2% in 2010 and 8.1% in 2011 having an increase of 0.9%. Return of common stock ratio that portrays the