Chapter 17, Problem 18E

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

Chapter
Section

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem
22 views

# Profitability ratiosRalph Lauren Corporation sells apparel through company-owned retail stores. Recent financial information for Ralph Lauren follows (in thousands):Assume that the apparel industry average return on total assets is 8.0% and the average return on stockholdersâ€™ equity is 10.0% for the year ended April 2, Year 3. a. Determine the return on total assets for Ralph Lauren for fiscal Years 2 and 3. Round percentages to one decimal place. b. Determine the return on stockholdersâ€™ equity for Ralph Lauren for fiscal Years 2 and 3. Round percentages to one decimal place. c. Evaluate the two-year trend for the profitability ratios determined in (a) and (b). d. Evaluate Ralph Laurenâ€™s profit performance relative to the industry.

a)

To determine

Determine Return on total assets for RL for fiscal years 2 and 3.

Explanation

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

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

Formula:

RateÂ ofÂ returnÂ onÂ assets=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets

Determine return on total assets.

Fiscal year 3:

RateÂ ofÂ returnÂ onÂ assets=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets=$567,600+$18,300$4,815,000=12.2% Fiscal year 2: RateÂ ofÂ returnÂ onÂ assets=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets=$479,500+$22,200$4,502,700=11

b)

To determine

Determine return on stockholders’ equity.

c)

To determine

Evaluate two-year trend for the profitability ratios.

d)

To determine

Evaluate RL’s profit performance relative to the industry.

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