Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781260159516
Author: PHILLIPS
Publisher: MCG
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Chapter 13, Problem 1CC

1.

To determine

Identify whether Company NGS was profitable in 2018 or 2017 by using gross profit percentage, return on equity and fixed assets turnover ratio.

1.

Expert Solution
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Explanation of Solution

Gross Profit Percentage:

Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.

Identify whether Company NGS was profitable in 2018 or 2017 by using gross profit percentage, return on equity and fixed assets turnover ratio.

Grossprofitpercentageratio (2017) }=(Netsalesrevenuecostofgoodssold)Netsalesrevenue×100=($56,000$48,000)$56,000×100=$8,000$56,000×100=14.29%

Grossprofitpercentageratio (2018) }=(Netsalesrevenuecostofgoodssold)Netsalesrevenue×100=($80,000$65,000)$80,000×100=$15,000$80,000×100=18.75%

Return on equity ratio:

Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.

Returnonequity(2017)}=(Netincomepreferreddividends)Averagecommonstockholders'equity×100=$2,10021,850 (1)×100=9.6%

Returnonequity(2018)}=(Netincomepreferreddividends)Averagecommonstockholders'equity×100=$6,950$32,025 (2)×100=21.70%

Working note (1):

Averagecommonstockholders'equity}=Opening+closing=($32,100+$11,600)2=$21,850

Working note (2):

Averagecommonstockholders'equity}=Opening+closing=($31,950+$32,100)2=$32,025

Fixed Asset turnover:

Fixed asset turnover is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.

Fixedassettrunover(2017)=NetrevenueAveragenetfixedassets=$56,000$53,000 (3)=1.06

Fixedassettrunover(2018)=NetrevenueAveragenetfixedassets=$80,000$71,500 (4)=1.12

Working note (3):

Average net fixedassets for 2017}=[opening balance of fixed asset+opening balance of fixed asset]2=$79,000+$27,0002=$53,000

Working note (4):

Average net fixedassets for 2018}=[opening balance of fixed asset+opening balance of fixed asset]2=$64,000+$79,0002=$71,500

By comparing the gross profit percentage, return on equity and fixed assets turnover ratio for 2017 and 2018, Company NGS has high gross profit percentage in 2018 for each sales dollar for the balance cover cost except cost of goods sold on 2018. NGS also has high profit percentage in 2018 than 2017 for return on equity and fixed assets turnover. Increase in the return on equity during 2018 reports that company is able to retain its business better than during the year 2017. Increase in the fixed asset turnover during  2018 reports that NGS is well organised to use its assets to generate its sales.

2.

To determine

Identify whether Company NGS was liquid in 2018 or 2017 by using current ratio.

2.

Expert Solution
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Explanation of Solution

Current ratio:

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Identify whether Company NGS was liquid in 2018 or 2017 by using current ratio.

Currentratio (2017) =CurrentassetsCurrentliabilities=$11,100$8,000=1.39

Currentratio (2018) =CurrentassetsCurrentliabilities=$10,950$8,000=1.37

It is difficult to determine whether Company NGS has more liquidity during 2018 or 2017 because company has sufficient current assets to meet out their current liabilities for every year.

3.

To determine

Identify whether Company NGS was liquid in 2018 or 2017 by using debt-to-assets and times interest earned ratio.

3.

Expert Solution
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Explanation of Solution

Debt to Asset Ratio:

Debt to asset ratio is the ratio between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Identify whether Company NGS was liquid in 2018 or 2017 by using debt-to-assets and times interest earned ratio.

Debt-to-assetratio (2017)=TotalliabilitiesTotalassets=$58,000$90,100=0.64

Debt-to-assetratio (2018)=TotalliabilitiesTotalassets=$43,000$74,560=0.57

Times interest earned ratio:

Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense.

Times Interest Earned (2017) = Net Income + Interest Expense + Income tax expenseInterest Expense=$2,100+$3,100+$800$3,100=1.94

Times Interest Earned (2018) = Net Income + Interest Expense + Income tax expenseInterest Expense=$6,950+$1,000+$3,050$1,000=11.00

Company NGS has more solvency during the year 2018 than 2017. Because increase in the times interest earned ratio during 2018, shows that the company has sufficient profit during the year 2018 to cover its interest. Decrease in the debt-to-assets ratio during 2018 than 2017, shows that company has reduced its financial risk level in the year 2018.

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Chapter 13 Solutions

Fundamentals Of Financial Accounting

Ch. 13 - What are the two essential characteristics of...Ch. 13 - Prob. 12QCh. 13 - Prob. 13QCh. 13 - Prob. 14QCh. 13 - Prob. 15QCh. 13 - Prob. 16QCh. 13 - 1. Which of the following ratios is not used to...Ch. 13 - Prob. 2MCCh. 13 - Prob. 3MCCh. 13 - Analysts use ratios to a. Compare different...Ch. 13 - Which of the following ratios incorporates stock...Ch. 13 - Prob. 6MCCh. 13 - Prob. 7MCCh. 13 - A bank is least likely to use which of the...Ch. 13 - Prob. 9MCCh. 13 - (Supplement 13A) Which of the following items is...Ch. 13 - Calculations for Horizontal Analyses Using the...Ch. 13 - Calculations for Vertical Analyses Refer to M13-1....Ch. 13 - Interpreting Horizontal Analyses Refer to the...Ch. 13 - Interpreting Vertical Analyses Refer to the...Ch. 13 - Prob. 5MECh. 13 - Prob. 6MECh. 13 - Prob. 7MECh. 13 - Analyzing the Inventory Turnover Ratio A...Ch. 13 - Inferring Financial Information Using the Current...Ch. 13 - Prob. 10MECh. 13 - Identifying Relevant Ratios Identify the ratio...Ch. 13 - Prob. 12MECh. 13 - Analyzing the Impact of Accounting Alternatives...Ch. 13 - Describing the Effect of Accounting Decisions on...Ch. 13 - Prob. 1ECh. 13 - Prob. 2ECh. 13 - Prob. 3ECh. 13 - Prob. 4ECh. 13 - Prob. 5ECh. 13 - Matching Each Ratio with Its Computational Formula...Ch. 13 - Computing and Interpreting Selected Liquidity...Ch. 13 - Prob. 8ECh. 13 - Prob. 9ECh. 13 - Prob. 10ECh. 13 - Prob. 11ECh. 13 - Prob. 12ECh. 13 - Prob. 13ECh. 13 - Prob. 14ECh. 13 - Analyzing the Impact of Alternative Inventory...Ch. 13 - Prob. 1CPCh. 13 - Prob. 2CPCh. 13 - Prob. 3CPCh. 13 - Prob. 4CPCh. 13 - Prob. 5CPCh. 13 - Prob. 6CPCh. 13 - Prob. 7CPCh. 13 - Prob. 1PACh. 13 - Prob. 2PACh. 13 - Prob. 3PACh. 13 - Prob. 4PACh. 13 - Prob. 5PACh. 13 - Using Ratios to Compare Loan Requests from Two...Ch. 13 - Prob. 7PACh. 13 - Prob. 1PBCh. 13 - Prob. 2PBCh. 13 - Prob. 3PBCh. 13 - Prob. 4PBCh. 13 - Prob. 5PBCh. 13 - Using Ratios to Compare Loan Requests from Two...Ch. 13 - Prob. 7PBCh. 13 - Prob. 1SDCCh. 13 - Prob. 2SDCCh. 13 - Prob. 5SDCCh. 13 - Prob. 6SDCCh. 13 - Prob. 7SDCCh. 13 - Prob. 1CC
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