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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Trend analysis
Critelli Company has provided the following comparative information:


You have been asked to evaluate the historical performance of the company over the last five years.

Selected industry ratios have remained relatively steady at the following levels for the last five years:


Instructions
I.Prepare three line graphs, with the ratio on the vertical axis and the years on die horizontal axis for the following three ratios (rounded to one decimal place):
A.Return on total assets
b.Return on stockholders' equity
c.Times interest earned
Display both the company ratio and the industry- benchmark on each graph. That is. each graph should have two lines.

To determine

(a)

Concept Introduction:

Return on total assets is a ratio used for profitability analysis. It shows the ability of the firm to earn profit from its assets.

It can be determined as follows:

Return on Total Assets = Net Income + Interest ExpenseAverage Total Assets

To represent:

The Company's return on total assets ratio as well as industry benchmark on a line graph.

Explanation
    YearNet Income(A)Interest Expense (B)Average Total Assets (C)Return on Total Assets (A+B)/C
    Year 5$1,785,000$400,000$9,500,0000.23
    Year 4$1,330,000$350,000$8,000,0000...
To determine

(b)

Introduction:

Return on shareholders' equityis a ratio used for profitability analysis. It shows the ability of the firm to earn profit from investment by the shareholders.

It can be determined as follows:

Return on shareholders' Equity = Net IncomeAverage Total Stockholders' Equity

To prepare:

The Company's return on shareholders' equity ratio as well as industry benchmark on line graph.

To determine

(c)

Introduction:

Time interest earned:

It is used to measure a company's ability to meet interest obligations on its debt. It can be calculated using following formula

  Time interest earned=Earning before interest and taxes  Total Interest payable

To prepare:

The Company's time interest earned ratio as well as industry benchmark on line graph.

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