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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Solvency and profitability trend analysis

Addai Company has provided the following comparative information:

images

You have been asked to evaluate the historical performance of the company over the last five years.

Selected industry ratios have remained relatively steady at the following levels for the last five years:

  20Y4–20Y8
Return on total assets 28%
Return on stockholders’ equity 18%
Times interest earned 2.7
Ratio of liabilities to stockholders’ equity 0.4

Instructions

1. Prepare four line graphs with the ratio on the vertical axis and the years on the horizontal axis for the following four ratios, rounding to one decimal place:

  1. a. Return on total assets
  2. b. Return on stockholders' equity
  3. c. Times interest earned
  4. d. Ratio of liabilities to stockholders' equity

Display both the company ratio and the industry benchmark on each graph. That is, each graph should have two lines.

2. Prepare an analysis of the graphs in (1).

1.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Given info: Items of financial statement

To determine: The following ratios for five years:

  1. (a) Return on total assets
  2. (b) Return on stockholders’ equity
  3. (c) Times interest earned ratio
  4. (d) Ratio of total liabilities to stockholders’ equity
Explanation

Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.

Formula:

Rate of return&#

2.

To determine

To prepare: Analysis of graphs

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