Chapter 24, Problem 13CP

To determine

Concept Introduction:

Assets: These are resources which the company owns and will generate future economic benefits. The assets are categorized into fixed asset which will help in generating revenues for long period of time and examples is plant and machinery, building , equipments etc and current assets are resources which will be converted into cash within one year examples are accounts receivable , inventory

Return on Investment: It shows the profitability and efficiency of assets in generating revenues. The formula of calculating Return of Investment is given below

$\begin{array}{l}\text{Return on Investment = }\frac{\text{Operating Income}}{\text{Average total assets}}\text{ x 100}\\ \text{Where}\\ \text{Average total Assets = }\frac{\text{opening balance of assets + closing balance of assets}}{2}\end{array}$

It always shown in percentage

Profit Margin Ratio: This ratio determines the percentage of operating profit on net sales and the formula to calculate it is given below

$\begin{array}{l}\text{Profit Margin Ratio = }\frac{\text{Operating Income}}{\text{Sales revenue }}\text{ x 100}\\ \end{array}$

It always shown in percentage

Asset Turnover Ratio: This ratio determines shows efficiency of average total assets in generating sales revenue the formula to calculate it is given below

$\begin{array}{l}\text{Asset Turnover Ratio = }\frac{\text{Sales Revenue}}{\text{Average total assets }}\\ \end{array}$

It always shown in times

Expanded Return on Investment Formula: This formula is taking into account combined effect of Profit margin ratio and Asset turnover ratio and its final result is equal to return on investment. The formula is given below

$\text{Expanded Return on Investment = Profit Margin Ratio x Asset Turnover Ratio}$

To Prepare:

Calculate expanded return on investment for the year 2017 for Thompson Toy Company