1. a)
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
The Return on total assets for five years (2012 to 2016).
1. a)
Explanation of Solution
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:
Return on total assets for five years (2012 to 2016) is calculated as below:
b)
The Return on stockholders’ equity for five years (2012 to 2016).
b)
Explanation of Solution
Formula:
Return on stockholders’ equity for five years is calculated as below:
c)
The Number of times interest charges are earned for five years (2012 to 2016).
c)
Explanation of Solution
Number of times interest charges are earned quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.
Formula:
Number of times interest charges are earned is calculated as below:
d)
The ratio of liabilities to stockholders’ equity for five years (2012 to 2016).
d)
Explanation of Solution
Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity. Liabilities are determined as the difference between ending balance of assets and stockholders’ equity.
Formula:
Ratio of liabilities to stockholders’ equity for five years (2012 to 2016) is calculated as below:
2.
To prepare: Analysis of graphs
2.
Explanation of Solution
- The return on total assets and return on stockholders’ equity is negative trend for the last five years. These measures have moved below the industry average. The reason behind this might be due to decline in the amount of earnings earned.
- The use of debt is very evident from the ratio of liabilities to stockholders’ equity and it is in the declining pace.
- The level of debt has been relative to the equity and has improved in the five years.
- The times interest earned ratio is below the industry average.
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Chapter 17 Solutions
Accounting,chap.14-26
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