Big Corporation reported the following income statement and balance sheet for the past two years: Big Corporation Comparative Income Statement For the Years Ended December 31, 2021 and 2020 2021 2020 Amount Amount Sales $ 100,600,800 $ 92,600,500 Cost of goods sold 66,750,500 60,750,800 Gross profit 33,850,300 31,849,700 Selling expenses 7,150,500 6,240,800 Administrative expenses 4,950,800 4,590,700 Total operating expenses 12,101,300 10,831,500 Income from operations 21,749,000 21,018,200 Interest Expense 425,500 476,300 Other income 148,400 127,200 Income before income tax 21,471,900 20,669,100 Income tax expense 8,588,800 8,267,700 Net income $ 12,883,100 $ 12,401,400 Big Corporation Comparative Balance Sheet As of December 31, 2021 and 2020 2021 2020 Cash $14,799,900 $6,850,600 Accounts receivable, net 14,105,300 11,335,700 Inventories 5,860,300 4,210,100 Prepaid Expenses 1,678,800 1,215,800 Total current assets 36,444,300 23,612,200 Fixed assets, net 35,600,700 32,400,500 Total assets $72,045,000 $56,012,700 Accounts payable $9,350,800 $8,430,900 Accrued expenses 3,230,300 3,180,500 Other current liabilities 5,875,100 6,470,700 Total current liabilities 18,456,200 18,082,100 Long-term debt 15,750,600 15,900,500 Common stock 5,750,000 5,750,000 Retained earnings 32,088,200 16,280,100 Total liabilities & equity $72,045,000 $56,012,700 Common Dividends Paid 2,250,000 2,180,000 a. Calculate the Return on Total Assets for 2021. b. Calculate the Return on Stockholders' Equity for 2021. c. Calculate the Net Profit Ratio for 2021.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Big Corporation reported the following income statement and
| Big Corporation | ||||||
| Comparative Income Statement | ||||||
| For the Years Ended December 31, 2021 and 2020 | ||||||
| 2021 | 2020 | |||||
| Amount | Amount | |||||
| Sales | $ 100,600,800 | $ 92,600,500 | ||||
| Cost of goods sold | 66,750,500 | 60,750,800 | ||||
| Gross profit | 33,850,300 | 31,849,700 | ||||
| Selling expenses | 7,150,500 | 6,240,800 | ||||
| Administrative expenses | 4,950,800 | 4,590,700 | ||||
| Total operating expenses | 12,101,300 | 10,831,500 | ||||
| Income from operations | 21,749,000 | 21,018,200 | ||||
| Interest Expense | 425,500 | 476,300 | ||||
| Other income | 148,400 | 127,200 | ||||
| Income before income tax | 21,471,900 | 20,669,100 | ||||
| Income tax expense | 8,588,800 | 8,267,700 | ||||
| Net income | $ 12,883,100 | $ 12,401,400 | ||||
| Big Corporation | ||||||
| Comparative Balance Sheet | ||||||
| As of December 31, 2021 and 2020 | ||||||
| 2021 | 2020 | |||||
| Cash | $14,799,900 | $6,850,600 | ||||
| 14,105,300 | 11,335,700 | |||||
| Inventories | 5,860,300 | 4,210,100 | ||||
| Prepaid Expenses | 1,678,800 | 1,215,800 | ||||
| Total current assets | 36,444,300 | 23,612,200 | ||||
| Fixed assets, net | 35,600,700 | 32,400,500 | ||||
| Total assets | $72,045,000 | $56,012,700 | ||||
| Accounts payable | $9,350,800 | $8,430,900 | ||||
| Accrued expenses | 3,230,300 | 3,180,500 | ||||
| Other current liabilities | 5,875,100 | 6,470,700 | ||||
| Total current liabilities | 18,456,200 | 18,082,100 | ||||
| Long-term debt | 15,750,600 | 15,900,500 | ||||
| Common stock | 5,750,000 | 5,750,000 | ||||
| 32,088,200 | 16,280,100 | |||||
| Total liabilities & equity | $72,045,000 | $56,012,700 | ||||
| Common Dividends Paid | 2,250,000 | 2,180,000 |
a. Calculate the Return on Total Assets for 2021.
b. Calculate the Return on
c. Calculate the Net Profit Ratio for 2021.
d. Calculate the Accounts Receivable Turnover for 2021.
e. Calculate the Inventory Turnover for 2021.
f. Calculate the Times Interest Earned Ratio for 2021.
Lets understand the basics.
Return on total assets is a ratio which shows how much earning before interest and tax is earned in compared to average assets used.
Formula = (Earning before interest and tax/Average assets) * 100
Return on stockholders equity is a ratio which shows how much net income is earned in compared to shareholders equity.
Formula = (Net income/Shareholders equity) * 100
Net profit ratio is a indicates the net income earned in compared to sales made.
Net profit ratio = (Net income/Sales) * 100
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