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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

Determining missing items in return computation

 One item is omitted from each of the following computations of the return on investment:

Return on Investment = Profit Margin × Investment Turnover
13.2% = 6% × (a)
(b) = 10% × 1.80
10.5% = (c) × 1.50
15.0% = 5% × (d)
(e) = 12% × 1.10

 Determine the missing items, identifying each by the appropriate letter.

To determine

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

To compute: The missing items.

Explanation

(a)

Determine investment turnover.

Return on investment = Profit margin × Investment turnover13.2%=6%×Investment turnoverInvestment turnover=13.2%6%=2.2

(b)

Determine return on investment.

Return on investment = Profit margin × Investment turnover=10%×1.80=18%

(c)

Determine profit margin.

Return on investment = Profit margin × Investment turnover10.5%=Profit margin ×1

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