Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
Question
Chapter 5, Problem 16E
To determine

Ascertain the following ratios of Company B:

  1. 1. Earnings per share.
  2. 2. Gross profit margin.
  3. 3. Operating profit margin.
  4. 4. Net profit margin.
  5. 5. Total assets turnover ratio.
  6. 6. Return on assets ratio.
  7. 7. Return on common equity.
  8. 8. Receivables turnover ratio.
  9. 9. Interest coverage.

Expert Solution & Answer
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Explanation of Solution

Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

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

Asset turnover ratio:

The Asset turnover is a contrast to the profit margin ratio and it is calculated to determine the net sales and average total assets. Use the following formula to calculate the asset turnover ratio:

Asset turnover =NetsalesAverage total assets

Return on assets:

Return on assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.

{Return on assets}=Net incomeTotal assets

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In simple, it indicates the number of times the average amount of net accounts receivables has been collected during a particular period.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average. It is otherwise known as days to collect.

Compute the ratio as follows:

  1. 1.      Calculate the earnings per share of Company B:

Earnings per share = Net incomePreferred dividendsAverage common shares outstanding=$24,000$010,000=$2.40

  1. 2.      Calculate the gross profit margin of company B:

Gross profit margin=Gross profitNet sales=$107,000$267,000×100=40.07%

  1. 3.      Calculate the operating profit margin of company B:

operating profit margin=Operating incomeNet sales=$45,000$267,000×100=16.85%

  1. 4.      Calculate the net profit margin of company B:

Net profit margin=Net incomeNet sales=$24,000$267,000×100=8.99%

  1. 5.      Calculate the total asset turnover ratio of Company B:

Total Assets turnover ratio=Net salesAverage total assets=$267,000$390,000 (1)=0.68

Working note (1):

Calculate the value of average total assets.

Average total assets=[Total assets in balance sheet+Total assets in adjustments]2=$400,000+$380,0002=$780,0002=$390,000

  1. 6.      Calculate the return on total assets of Company B:

Return on total assets=Net income+Interest expenseAverage total assets=$24,000+$7,810 (2)$390,000 (1)=8.16%

Working note (2):

Calculate the value of interest expense.

Interest expense=Interest expense×(1Effective tax rate)=$11,000×(1$10,000 (Income taxes)$34,000)=$11,000×(10.29)=$7,810

  1. 7.      Calculate the return on common equity of Company B:

Return on commmon equity=Net incomeAverage sahreholder's equity=$24,000$245,500 (3)=9.78%

Working note (3):

Calculate the average shareholder’s equity.

Average shareholder's equity=[Common stock+Paid in capital+Retained earnings]+Shareholder's equity2=($100,000+$95,000+$55,000)+241,0002=$491,0002=$245,500

  1. 8.      Calculate the receivable turnover of Company B:

Return on commmon equity=Net credit salesAverage net receivables=$208,260 (4)$23,000 (5)=9.05times

Working note (4):

Compute the net credit sales:

Net credit sales=Net sales×Credit percentage=$267,000×78100=$208,260

Working note (5):

Compute the average net receivable:

Average net receivable=$24,000+$22,0002=$46,0002=$23,000

  1. 9.      Calculate the interest coverage of Company B:

Return on commmon equity=Pretax operating incomeInterest expense=$24,000+$10,000+$11,0000$11,000=4.09 times

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Chapter 5 Solutions

Intermediate Accounting: Reporting And Analysis

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